Item 1. Financial Statements
Item 1. Financial Statements
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share amounts)
(unaudited)
September 30, June 30,
2023 2023
ASSETS
Current assets:
Cash and cash equivalents $ 543,156 $ 440,459
Accounts receivable, net of allowance for credit losses of $ 79 and $ 82 at September 30, 2023 and June 30, 2023, respectively (including accounts receivable from related parties of $ 1,335 and $ 5,473 at September 30, 2023 and June 30, 2023, respectively)
845,729 1,148,259
Inventories 2,052,805 1,445,564
Prepaid expenses and other current assets (including receivables from related parties of $ 24,905 and $ 27,732 at September 30, 2023 and June 30, 2023, respectively)
129,144 145,144
Total current assets 3,570,834 3,179,426
Property, plant and equipment, net 291,669 290,240
Deferred income taxes, net 185,675 162,654
Other assets 47,786 42,409
Total assets $ 4,095,964 $ 3,674,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $ 92,115 and $ 89,134 at September 30, 2023 and June 30, 2023, respectively)
$ 1,084,058 $ 776,831
Accrued liabilities (including amounts due to related parties of $ 16,504 and $ 14,017 at September 30, 2023 and June 30, 2023, respectively)
152,500 163,865
Income taxes payable 161,395 129,166
Short-term debt 40,843 170,123
Deferred revenue 166,025 134,667
Total current liabilities 1,604,821 1,374,652
Deferred revenue, non-current 174,478 169,781
Long-term debt 105,389 120,179
Other long-term liabilities 45,737 37,947
Total liabilities 1,930,425 1,702,559
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and additional paid-in capital, $ 0.001 par value
Authorized shares: 100,000 ; Issued and outstanding shares: 53,295 and 52,901 at September 30, 2023 and June 30, 2023, respectively
574,718 538,352
Accumulated other comprehensive income 651 639
Retained earnings 1,590,009 1,433,014
Total Super Micro Computer, Inc. stockholders’ equity 2,165,378 1,972,005
Noncontrolling interest 161 165
Total stockholders’ equity 2,165,539 1,972,170
Total liabilities and stockholders’ equity $ 4,095,964 $ 3,674,729
See accompanying notes to condensed consolidated financial statements.
SMCI | Q1 2024 Form 10-Q | 1
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
September 30,
2023 2022
Net sales (including related party sales of $ 17,396 and $ 25,055 in the three months ended September 30, 2023 and 2022, respectively)
$ 2,119,672 $ 1,852,130
Cost of sales (including related party purchases of $ 113,107 and $ 96,536 in the three months ended September 30, 2023 and 2022, respectively)
1,765,981 1,504,595
Gross profit 353,691 347,535
Operating expenses:
Research and development 111,027 74,243
Sales and marketing 37,230 29,363
General and administrative 32,924 23,806
Total operating expenses 181,181 127,412
Income from operations 172,510 220,123
Other income, net
6,613 8,054
Interest expense ( 1,863 ) ( 3,938 )
Income before income tax provision 177,260 224,239
Income tax provision ( 20,215 ) ( 38,934 )
Share of loss from equity investee, net of taxes
( 50 ) ( 889 )
Net income $ 156,995 $ 184,416
Net income per common share:
Basic $ 2.96 $ 3.51
Diluted $ 2.75 $ 3.35
Weighted-average shares used in the calculation of net income per common share:
Basic 53,093 52,598
Diluted 57,185 55,017
See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended
September 30,
2023 2022
Net income $ 156,995 $ 184,416
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) 12 ( 397 )
Total other comprehensive income (loss), net of tax 12 ( 397 )
Total comprehensive income $ 157,007 $ 184,019
See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Three Months Ended September 30, 2023 Common Stock and
Additional Paid-In
Capital Accumulated
Other
Comprehensive Income Retained
Earnings Non-controlling Interest Total
Stockholders’
Equity
Shares Amount
Balance at June 30, 2023 52,901,358 $ 538,352 $ 639 $ 1,433,014 $ 165 $ 1,972,170
Exercise of stock options, net of taxes 188,957 4,288 — — — 4,288
Release of common stock shares upon vesting of restricted stock units 297,656 — — — — —
Shares withheld for the withholding tax on vesting of restricted stock units ( 92,973 ) ( 25,301 ) — — — ( 25,301 )
Stock-based compensation — 57,379 — — — 57,379
Other comprehensive income — — 12 — — 12
Net income — — — 156,995 ( 4 ) 156,991
Balance at September 30, 2023 53,294,998 $ 574,718 $ 651 $ 1,590,009 $ 161 $ 2,165,539
Three Months Ended September 30, 2022
Common Stock and
Additional Paid-In
Capital Accumulated
Other
Comprehensive Income (Loss)
Retained
Earnings Non-controlling Interest Total
Stockholders’
Equity
Shares Amount
Balance at June 30, 2022 52,311,014 $ 481,741 $ 911 $ 942,923 $ 172 $ 1,425,747
Exercise of stock options, net of taxes 405,226 8,144 — — — 8,144
Release of common stock shares upon vesting of restricted stock units 193,532 — — — — —
Shares withheld for the withholding tax on vesting of restricted stock units ( 58,303 ) ( 3,716 ) — — — ( 3,716 )
Stock-based compensation — 11,014 — — — 11,014
Other comprehensive loss
— — ( 397 ) — — ( 397 )
Net income (loss) — — — 184,416 ( 5 ) 184,411
Balance at September 30, 2022 52,851,469 $ 497,183 $ 514 $ 1,127,339 $ 167 $ 1,625,203
See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
September 30,
2023 2022
OPERATING ACTIVITIES:
Net income $ 156,995 $ 184,416
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization 9,155 8,547
Stock-based compensation expense 57,379 11,014
Share of loss from equity investee
50 889
Foreign currency exchange gain
( 6,192 ) ( 9,203 )
Deferred income taxes, net ( 23,021 ) ( 19,226 )
Other 2,657 ( 306 )
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $ 4,138 and $( 1,851 ) during the three months ended September 30, 2023 and 2022, respectively)
302,501 95,088
Inventories ( 607,241 ) ( 190,449 )
Prepaid expenses and other assets (including changes in related party balances of $ 2,827 and $( 10,139 ) during the three months ended September 30, 2023 and 2022, respectively)
19,990 ( 11,991 )
Accounts payable (including changes in related party balances of $ 2,981 and $ 6,674 during the three months ended September 30, 2023 and 2022, respectively)
302,973 132,302
Income taxes payable 32,229 26,668
Accrued liabilities (including changes in related party balances of $ 2,487 and $ 9,585 during the three months ended September 30, 2023 and 2022, respectively)
( 13,019 ) 8
Deferred revenue 36,055 85,989
Other long-term liabilities (including changes in related party balances of $( 80 ) and $( 105 ) during the three months ended September 30, 2023 and 2022, respectively)
( 46 ) ( 159 )
Net cash provided by operating activities
270,465 313,587
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $ 826 and $ 729 during the three months ended September 30, 2023 and 2022, respectively)
( 2,631 ) ( 10,746 )
Investment in marketable securities
( 5,000 ) —
Net cash used in investing activities
( 7,631 ) ( 10,746 )
FINANCING ACTIVITIES:
Proceeds from borrowings — 79,141
Repayment of debt ( 138,938 ) ( 414,737 )
Proceeds from exercise of stock options, net of taxes 4,288 8,144
Payment of withholding tax on vesting of restricted stock units ( 25,301 ) ( 3,716 )
Other 10 ( 15 )
Net cash used in financing activities
( 159,941 ) ( 331,183 )
Effect of exchange rate fluctuations on cash ( 203 ) ( 1,472 )
Net increase (decrease) in cash, cash equivalents and restricted cash
102,690 ( 29,813 )
Cash, cash equivalents and restricted cash at the beginning of the period 440,960 268,559
Cash, cash equivalents and restricted cash at the end of the period $ 543,650 $ 238,746
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,214 $ 4,076
Cash paid for taxes, net of refunds $ 8,999 $ 27,274
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Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $ 3,672 and $ 3,782 as of September 30, 2023 and 2022, respectively)
$ 8,032 $ 6,599
Right of use ("ROU") assets obtained in exchange for operating lease commitments $ 9,177 $ 750
See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Significant Accounting Policies and Estimates
No material changes have been made to the significant accounting policies of Super Micro Computer, Inc., a corporation incorporated under the laws of Delaware, and its consolidated entities (together, the “Company”), disclosed in Part II, Item 8, Note 1, "Organization and Summary of Significant Accounting Policies," in its Annual Report on Form 10-K, filed on August 28, 2023, for the year ended June 30, 2023. Management's estimates take into consideration, as applicable, general macroeconomic conditions, inflation, changes in interest rates and geopolitical events.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations.
The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The consolidated results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2024.
Certain prior year amounts within cash from operating activities in the condensed consolidated statements of cash flows have been reclassified to conform to current year presentation. These changes in presentation do not affect previously reported results.
Concentration of Supplier Risk
Certain materials used by the Company in the manufacturing of its 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. Two suppliers accounted for 55.1 % and 10.3 % of total purchases for the three months ended September 30, 2023, and the same two suppliers accounted for 25.7 % and 16.1 % of total purchases for the three months ended September 30, 2022. The increase in concentration of total purchases to one of the Company's suppliers to 55.1 % of total purchases for the three months ended September 30, 2023 is as a result of the purchase of GPUs to build its solutions for the Company's customers. Purchases from Ablecom, and Compuware, related parties of the Company (see Part I, Item 1, Note 8, "Related Party Transactions") accounted for a combined 6.4 % of total cost of sales for both the three months ended September 30, 2023 and 2022.
Concentration of Credit and Customer Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.
Three customers accounted for 15.7 %, 14.5 % and 10.3 % of accounts receivable, net as of September 30, 2023. Two customers accounted for 22.9 % and 19.3 % of accounts receivable, net as of June 30, 2023. These accounts receivable represent a concentration of credit risk to the Company.
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.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 2. Revenue
Disaggregation of Revenue
The Company disaggregates revenue by type of product and by the geographical market. Service revenues, which are less than 10%, are not a significant component of total revenue, and are aggregated within the respective categories.
The following is a summary of net sales by product type (in thousands):
Three Months Ended
September 30,
2023 2022
Server and storage systems $ 1,966,608 $ 1,713,056
Subsystems and accessories 153,064 139,074
Total $ 2,119,672 $ 1,852,130
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.
International net sales are based on the country and geographic region to which the products were shipped. The following is a summary for the three months ended September 30, 2023 and 2022, of net sales by geographic region (in thousands):
Three Months Ended
September 30,
2023 2022
United States $ 1,619,514 $ 1,295,504
Asia 225,468 270,024
Europe 190,848 235,074
Other 83,842 51,528
Total $ 2,119,672 $ 1,852,130
Contract Balances
Generally, the payment terms of the Company’s offerings range from 30 to 60 days. In certain instances, customers may prepay for products and services in advance of delivery. Receivables relate to the Company’s unconditional right to consideration for performance obligations either partially or fully completed.
Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when such right is conditional on something other than the passage of time. Such contract assets are insignificant to the Company’s condensed consolidated financial statements.
Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligations. The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. Additionally, at times, deferred revenue may fluctuate due to the timing of advance consideration received from non-cancellable non-refundable contract liabilities relating to the sale of future products. Revenue recognized during the three months ended September 30, 2023, which was included in the opening deferred revenue balance as of June 30, 2023, of $ 304.4 million, was $ 43.7 million.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Deferred revenue increased $ 36.1 million as of September 30, 2023 as compared to the fiscal year ended June 30, 2023. This increase was mainly due to a $ 21.1 million increase in non-cancellable non-refundable advance consideration or cash consideration received from customers which preceded the Company's satisfaction of the associated performance obligations relating to product sales expected to be fulfilled in the next 12 months.
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially delivered, as of the end of the reporting period. The Company applies the exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site services, including integration services and extended warranty services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of September 30, 2023 was approximately $ 340.5 million . The Company expects to recognize approximately 49 % of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.
Capitalized Contract Acquisition Costs and Fulfillment Cost
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive bonuses paid to Company employees. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be one year or less, generally upon delivery of the associated server and storage systems or components. Where the amortization period of the contract cost would be more than a year, the Company applies judgment in the allocation of the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. Contract acquisition costs allocated to service performance obligations that are subject to capitalization are insignificant to the Company’s condensed consolidated financial statements.
Contract fulfillment costs consist of costs paid in advance for outsourced services provided by third parties to the extent they are not in the scope of other guidance. Fulfillment costs paid in advance for outsourced services provided by third parties are capitalized and amortized over the period the services are expected to be provided. Such fulfillment costs are insignificant to the Company’s condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 3. Net Income Per Common Share
The following table shows the computation of basic and diluted net income per common share for the three months ended September 30, 2023 and 2022 (in thousands, except per share amounts):
Three Months Ended
September 30,
2023 2022
Numerator:
Net income $ 156,995 $ 184,416
Denominator:
Weighted-average shares outstanding 53,093 52,598
Effect of dilutive securities 4,092 2,419
Weighted-average diluted shares 57,185 55,017
Basic net income per common share $ 2.96 $ 3.51
Diluted net income per common share $ 2.75 $ 3.35
For the three months ended September 30, 2023 and 2022, the Company had stock options, restricted stock units ("RSUs") and performance based restricted stock units ("PRSUs") outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 337,730 and 307,395 for the three months ended September 30, 2023 and 2022, respectively.
Note 4. Balance Sheet Components
The following tables provide details of the selected balance sheet items (in thousands):
Cash, Cash Equivalents and Restricted Cash:
September 30, 2023 June 30, 2023
Cash and cash equivalents $ 543,156 $ 440,459
Restricted cash included in other assets 494 501
Total cash, cash equivalents and restricted cash $ 543,650 $ 440,960
Inventories:
September 30, 2023 June 30, 2023
Finished goods $ 1,364,995 $ 1,045,177
Work in process 333,689 71,874
Purchased parts and raw materials 354,121 328,513
Total inventories $ 2,052,805 $ 1,445,564
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Property, Plant, and Equipment:
September 30, 2023 June 30, 2023
Buildings $ 143,496 $ 143,496
Machinery and equipment 133,600 130,151
Land 87,217 86,642
Building and leasehold improvements 59,984 59,634
Furniture and fixtures 38,345 36,303
Software 23,680 23,098
Building construction in progress 303 303
486,625 479,627
Accumulated depreciation and amortization ( 194,956 ) ( 189,387 )
Property, plant and equipment, net $ 291,669 $ 290,240
Accrued Liabilities:
September 30, 2023 June 30, 2023
Accrued payroll and related expenses $ 38,658 $ 53,439
Contract manufacturers liabilities 23,741 23,634
Customer deposits 19,722 16,577
Accrued cooperative marketing expenses 10,764 9,744
Accrued warranty costs 9,107 9,079
Operating lease liability 8,473 7,292
Accrued professional fees 813 2,363
Other 41,222 41,737
Total accrued liabilities $ 152,500 $ 163,865
Product Warranties:
Three Months Ended
September 30,
2023 2022
Balance, beginning of the period $ 14,859 $ 12,136
Provision for warranty 12,529 8,617
Costs utilized ( 11,804 ) ( 8,473 )
Change in estimated liability for pre-existing warranties 45 423
Balance, end of the period 15,629 12,703
Current portion 9,107 8,540
Non-current portion $ 6,522 $ 4,163
Note 5. Fair Value Disclosure
The financial instruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and accrued liabilities. The Company classifies its financial instruments, except for its investment in an auction rate security, within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted prices in active markets or alternative pricing sources and models using market observable inputs to determine their fair value.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the determination of its fair value was not based on observable inputs as of September 30, 2023 and June 30, 2023. The Company is using the discounted cash flow method to estimate the fair value of the auction rate security at each period end and the following assumptions: (i) the expected yield based on observable market rate of similar securities, (ii) the security coupon rate that is reset monthly, (iii) the estimated holding period and (iv) a liquidity discount. The liquidity discount assumption is based on the management estimate of lack of marketability discount of similar securities and is determined based on the analysis of financial market trends over time, recent redemptions of securities and other market activities.
Financial Assets and Liabilities Measured on a Recurring Basis
The following table sets forth the Company’s financial instruments as of September 30, 2023 and June 30, 2023, which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):
September 30, 2023 Level 1 Level 2 Level 3 Asset at
Fair Value
Assets
Money market funds (1)
$ 21,075 $ — $ — $ 21,075
Certificates of deposit (2)
— 126,951 — 126,951
Investment in marketable securities 3,866 — — 3,866
Auction rate security — — 1,843 1,843
Total assets measured at fair value $ 24,941 $ 126,951 $ 1,843 $ 153,735
June 30, 2023 Level 1 Level 2 Level 3 Asset at
Fair Value
Assets
Money market funds (1)
$ 20,823 $ — $ — $ 20,823
Certificates of deposit (2)
— 462 — 462
Auction rate security — — 1,843 1,843
Total assets measured at fair value $ 20,823 $ 462 $ 1,843 $ 23,128
(1) $ 20.9 million and $ 20.6 million in money market funds are included cash and cash equivalents and $ 0.2 million and $ 0.2 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023, respectively.
(2) $ 126.7 million and $ 0.2 million in certificates of deposit are included in cash and cash equivalents, $ 0.1 million and $ 0.1 million in certificates of deposit are included in prepaid expenses and other assets, and $ 0.2 million and $ 0.2 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023, respectively.
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued liabilities approximate their fair values. The investment in marketable securities is carried at fair value using values available on a public exchange and is based on a Level 1 input. The investment is accounted for as an equity security, with unrealized gains and losses included in earnings. Unrealized loss of $ 1.1 million has been recorded in Other income, net in the condensed consolidated statement of operations for the three months ended September 30, 2023.
On a quarterly basis, the Company also evaluates the current expected credit loss by co nsidering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For the three months ended September 30, 2023, the credit losses related to the Company’s investments were not material.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
There was immaterial movement in the balances of the Company's financial assets measured at fair value on a recurring basis, consisting of investment in an auction rate security, using significant unobservable inputs (Level 3) for the three months ended September 30, 2023 and 2022.
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three months ended September 30, 2023 and 2022.
The following is a summary of the Company’s investment in an auction rate security as of September 30, 2023 and June 30, 2023 (in thousands):
Cost Basis Gross
Unrealized
Holding
Gains Gross
Unrealized
Holding
Losses Fair Value
Auction rate security $ 1,750 $ 287 $ ( 194 ) $ 1,843
No gain or loss was recognized in other comprehensive income for the auction rate security for the three months ended September 30, 2023 and 2022.
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of September 30, 2023 and June 30, 2023, total debt of $ 146.2 million and $ 290.3 million, respectively, was reported at amortized cost. This outstanding debt was classified as Level 2 as it was not actively traded. The amortized cost of the outstanding debt approximates the fair value.
Other Financial Assets - Investments into Non-Marketable Equity Securities
The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values in the amount of $ 0.1 million and $ 1.7 million as of September 30, 2023 and June 30, 2023, respectively. The Company accounts for these investments at cost less impairment, if any, plus or minus changes from observable price changes in orderly transactions for the identical or similar investments by the same issuer. During the three months ended September 30, 2023, the Company performed a qualitative assessment and identified impairment indicators. The Company recorded a $ 1.6 million impairment during the three months ended September 30, 2023 in Other income, net on the condensed consolidated statement of operations. The Company did not have any impairment to the carrying values of the non-marketable equity securities during the three months ended September 30, 2022.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 6. Short-term and Long-term Debt
Short-term and long-term debt obligations as of September 30, 2023 and June 30, 2023 consisted of the following (in thousands):
September 30, June 30,
2023 2023
Line of credit:
2018 Bank of America Credit Facility $ — $ —
2022 Bank of America Credit Facility — —
Cathay Bank Line of Credit — 131,583
2021 CTBC Credit Lines — —
HSBC Bank Credit Facility — —
Mega Bank Credit Facility — —
Total line of credit — 131,583
Term loan facilities:
Chang Hwa Bank Credit Facility due October 15, 2026 23,892 26,853
CTBC Term Loan Facility, due June 4, 2030
35,424 38,208
2021 CTBC Credit Lines, due August 15, 2026 4,183 4,721
2021 E.SUN Bank Credit Facility, due September 15, 2026 29,756 33,513
2022 ESUN Bank Credit Facility, due August 15, 2027 15,782 16,756
Mega Bank Credit Facility, due September 15, 2026 37,195 38,668
Total term loans 146,232 158,719
Total debt 146,232 290,302
Short-term debt and current portion of long-term debt 40,843 170,123
Debt, non-current $ 105,389 $ 120,179
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Activities under Revolving Lines of Credit and Term Loans
Available borrowings and interest rates as of September 30, 2023 and June 30, 2023 consisted of the following (in thousands except for percentages):
September 30, 2023
June 30, 2023
Available borrowings Interest rate Available borrowings Interest rate
Line of credit:
2018 Bank of America Credit Facility $ 350,000 6.80 % $ 350,000 6.57 %
2022 Bank of America Credit Facility $ 20,000 3.36 % $ 20,000 3.36 %
Cathay Bank Line of Credit $ 132,000 7.50 % $ 417 7.08 %
2022 CTBC Credit Lines
$ — — $ 105,000 3.33 %
2023 CTBC Credit Line
$ 105,000 3.33 %
$ — —
Chang Hwa Bank Credit Facility $ 20,000 6.51 % $ 20,000 6.58 %
HSBC Bank Credit Facility $ 50,000 4.50 % $ 50,000 4.50 %
2022 E.SUN Bank Credit Facility $ 30,000 4.18 % $ 30,000 4.18 %
Mega Bank Credit Facility $ 20,000 2.55 % $ 20,000 2.55 %
Term loan facilities:
Chang Hwa Bank Credit Facility due October 15, 2026 $ — 1.55 % $ — 1.55 %
CTBC Term Loan Facility, due June 4, 2030
$ — 1.20 % $ — 1.20 %
2021 CTBC Credit Lines, due August 15, 2026 $ — 1.40 % $ — 1.40 %
2021 E.SUN Bank Credit Facility, due September 15, 2026
$ — 1.75 % $ 7,734 1.75 %
2022 ESUN Bank Credit Facility, due August 15, 2027 $ — 1.75 % $ — 1.75 %
Mega Bank Credit Facility, due September 15, 2026 $ — 1.40 % - 1.60 %
$ — 1.40 % - 1.60 %
See “Part II. Item 8. Financial Statements and Supplementary Data – Note 7. Short-term and Long-term Debt” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 for a more complete description of the Company's credit facilities.
The Company entered into a new General Credit Agreement with CTBC Bank during the three months ended September 30, 2023 with the following terms:
CTBC Bank
2023 CTBC Bank Credit Lines
On September 28, 2023 (the “Effective Date”), the Company's Taiwan subsidiary entered into a new general agreement for omnibus credit lines with CTBC Bank, which replaces the prior CTBC credit lines in their entirety and permits for borrowings, from time to time, thereunder pursuant to various individual credit arrangements and includes the previously issued long and medium term loan facility of NTD 1,550.0 million entered in 2021 and 2020 (the “Long and Medium Loan Facility”), and each of (i) a short-term loan and guarantee line providing credit of up to NTD 1,250.0 million and NTD 100.0 million, respectively (the “NTD Short Term Loan/Guarantee Line”), (ii) a short-term loan providing a line of credit of up to $ 40.0 million (the “USD Short Term Loan Line”), and (iii) an export/import o/a loan line providing a line of credit of up to $ 105.0 million for exports and $ 50.0 million for imports (the “Export/Import Line,” and, together with the NTD Short Term Loan/Guarantee Line and the USD Short Term Loan Line, the “New CTBC Credit Lines”). Aggregate borrowings under the New CTBC Credit Lines together is subject to a cap of $ 105.0 million.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Interest rates under each of the individual New CTBC Credit Lines are to be established according to individual credit arrangements, which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions. Each of the NTD Short Term Loan/Guarantee Line and USD Short Term Loan Line are secured by certain of the Company's Taiwan subsidiary’s assets, including certain property, land, and plant. The tenor for each of the individual New CTBC Credit Lines is one year. For the Long and Medium Loan Facility, the Taiwan subsidiary is subject to various financial covenants, including current ratio, debt service coverage ratio, and financial debt ratio requirements. In the event the Taiwan subsidiary does not satisfy such financial covenants, CTBC Bank is permitted to, among other things, reduce the permitted total borrowings to a cap of $ 70.0 million from $ 105.0 million. Additional covenants require, among other things, the Company to maintain ownership of all of the capital stock of its Taiwan subsidiary and prohibit secondary mortgages on certain assets securing various of the New CTBC Credit Lines. The New CTBC Credit Lines have customary default provisions permitting CTBC Bank to suspend the extension of credit, reduce the credit line, shorten the credit extension term, or declare all principal and interest amounts immediately due and payable upon the occurrence of an event of default.
The Company's Taiwan subsidiary intends to use borrowings under the New CTBC Credit Lines in connection with financing of eligible accounts receivable and accounts payable (vendor invoices) and to finance additional improvements to the Company’s Bade Manufacturing Facility located in Taiwan.
Principal payments on short-term and long-term obligations are due as follows (in thousands):
Fiscal Year Principal Payments
Remainder of 2024 $ 30,632
2025 40,843
2026 40,843
2027 17,744
2028 5,985
2029 and thereafter 10,185
Total short-term and long-term debt $ 146,232
The Company is in compliance with all the covenants for the outstanding debt.
Note 7. Leases
The Company leases offices, warehouses and other premises, vehicles and certain equipment leased under non-cancelable operating leases. Operating lease expense recognized and supplemental cash flow information related to operating leases for the three months ended September 30, 2023 and 2022 were as follows (in thousands):
Three Months Ended
September 30,
2023 2022
Operating lease expense (including expense for lease agreements with related parties of $ 139 and $ 143 for the three months ended September 30, 2023 and 2022, respectively)
$ 2,184 $ 2,110
Cash payments for operating leases (including payments to related parties of $ 128 and $ 130 for the three months ended September 30, 2023 and 2022, respectively)
$ 2,083 $ 2,038
New operating lease assets obtained in exchange for operating lease liabilities $ 9,177 $ 750
During the three months ended September 30, 2023 and 2022, the Company’s costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial. Non-lease variable payments expensed in the three months ended September 30, 2023 and 2022 were immaterial.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
As of September 30, 2023, the weighted average remaining lease term for operating leases was 3.5 years and the weighted average discount rate was 4.1 %. Maturities of operating lease liabilities under noncancelable operating lease arrangements as of September 30, 2023 were as follows (in thousands):
Fiscal Year: Maturities of operating leases
Remainder of 2024
$ 6,942
2025
9,248
2026
5,226
2027
3,737
2028
2,735
2029 and beyond
364
Total future lease payments 28,252
Less: Imputed interest ( 2,183 )
Present value of operating lease liabilities $ 26,069
The Company has entered into lease agreements with related parties. See Part I, Item 1, Note 8, “Related Party Transactions,” for a further discussion.
Note 8. Related Party Transactions
The Company has a variety of business relationships with Ablecom and Compuware. Ablecom and Compuware are both Taiwan corporations. Ablecom is one of the Company’s major contract manufacturers; Compuware is both a distributor of the Company’s products and a contract manufacturer for the Company. Ablecom’s Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board. Steve Liang and his family members owned approximately 36.0 % of Ablecom’s stock and Charles Liang and his spouse, Sara Liu, who is also an officer and director of the Company, collectively owned approximately 10.5 % of Ablecom’s capital stock as of September 30, 2023. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom. Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. Neither Charles Liang nor Sara Liu own any capital stock of Compuware and the Company does not own any of Ablecom or Compuware’s capital stock.
Dealings with Ablecom
The Company has entered into a series of agreements with Ablecom, including multiple product development, production and service agreements, product manufacturing agreements, manufacturing services agreements and lease agreements for warehouse space.
Under these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of its server chassis manufacturing as well as an immaterial portion of other components. Ablecom manufactured approximately 85.5 % and 88.4 % of the chassis included in the products sold by the Company during the three months ended September 30, 2023 and 2022, respectively. With respect to design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Ablecom for the design and engineering services, and further agrees to pay Ablecom for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
With respect to the manufacturing aspects of the relationship, Ablecom purchases most of materials needed to manufacture the chassis from third parties and the Company provides certain components used in the manufacturing process (such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and components to manufacture the completed chassis and then sell them back to the Company. For the components purchased from the Company, Ablecom sells the components back to the Company at a price equal to the price at which the Company sold the components to Ablecom. The Company and Ablecom frequently review and negotiate the prices of the chassis the Company purchases from Ablecom. In addition to inventory purchases, the Company also incurs other costs associated with design services, tooling and other miscellaneous costs from Ablecom.
The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding cancellable and non-cancellable purchase orders from the Company to Ablecom on September 30, 2023 were $ 49.5 million and $ 27.7 million, respectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Ablecom on June 30, 2023 were $ 37.4 million and $ 23.7 million, respectively, effectively representing the exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume and at acceptable prices.
Dealings with Compuware
The Company has entered into a distribution agreement with Compuware, under which the Company appointed Compuware as a non-exclusive distributor of the Company’s products in Taiwan, China and Australia. Compuware assumes the responsibility to install the Company’s products at the site of the end customer, if required, and administers customer support in exchange for a discount from the Company’s standard price for its purchases.
The Company also has entered into a series of agreements with Compuware, including multiple product development, production and service agreements, product manufacturing agreements, and lease agreements for office space.
Under these agreements, the Company outsources to Compuware a portion of its design activities and a significant part of its power supplies manufacturing as well as an immaterial portion of other components. With respect to design activities, Compuware generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Compuware for the design and engineering services, and further agrees to pay Compuware for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling. With respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these materials to manufacture the products and then sell those products to the Company. The Company and Compuware frequently review and negotiate the prices of the power supplies the Company purchases from Compuware.
Compuware also manufactures motherboards, backplanes and other components used on printed circuit boards for the Company. The Company sells to Compuware most of the components needed to manufacture the above products. Compuware uses the components to manufacture the products and then sells the products back to the Company at a purchase price equal to the price at which the Company sold the components to Compuware, plus a “manufacturing value added” fee and other miscellaneous material charges and costs including overhead and labor. The Company and Compuware frequently review and negotiate the amount of the “manufacturing value added” fee that will be included in the price of the products the Company purchases from Compuware. In addition to the inventory purchases, the Company also incurs costs associated with design services, tooling assets, and miscellaneous costs.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding cancellable and non-cancellable purchase orders from the Company to Compuware on September 30, 2023 were $ 138.2 million and $ 38.8 million, respectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Compuware on June 30, 2023 were $ 156.2 million and $ 46.8 million, respectively, effectively representing the exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.
Dealings with Investment in a Corporate Venture
In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the “Corporate Venture”) located in China to expand the Company’s presence in China. The Corporate Venture is 30 % owned by the Company and 70 % owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for using the equity method. As such, the Corporate Venture is also a related party.
The Company recorded a deferred gain related to the contribution of certain technology rights. There was no balance in the deferred gain in the consolidated balance sheets as of September 30, 2023 and June 30, 2023.
The Company monitors the investment for events or circumstances indicative of potential impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the third-party parent company that controls the Corporate Venture was placed on a U.S. government export control list, along with several of such third-party parent’s related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not itself a restricted party. The Company has concluded that the Corporate Venture is in compliance with the new restrictions. The Company does not believe that the equity investment carrying value is impacted as of September 30, 2023. No impairment charge was recorded for the three months ended September 30, 2023 or 2022.
The Company sold products worth $ 0.8 million and $ 11.3 million to the Corporate Venture during the three months ended September 30, 2023 and 2022, respectively. The Company’s share of intra-entity profits on the products that remained unsold by the Corporate Venture as of September 30, 2023 and June 30, 2023 have been eliminated and have reduced the carrying value of the Company’s investment in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company had $ 0.2 million and $ 1.9 million due from the Corporate Venture in accounts receivable, net as of September 30, 2023 and June 30, 2023, respectively.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The Company had the following balances related to transactions with its related parties as of September 30, 2023 and June 30, 2023 (in thousands):
Ablecom Compuware Corporate Venture Total
September 30, 2023 June 30, 2023 September 30, 2023 June 30, 2023 September 30, 2023 June 30, 2023 September 30, 2023 June 30, 2023
Accounts receivable $ 4 $ 2 $ 1,092 $ 3,528 $ 239 $ 1,943 $ 1,335 $ 5,473
Other receivable (1)
$ 2,283 $ 2,841 $ 22,622 $ 24,891 $ — $ — $ 24,905 $ 27,732
Accounts payable $ 44,476 $ 35,711 $ 47,639 $ 53,423 $ — $ — $ 92,115 $ 89,134
Accrued liabilities (2)
$ 485 $ 1,230 $ 16,019 $ 12,787 $ — $ — $ 16,504 $ 14,017
(1) Other receivables include receivables from vendors included in prepaid and other current assets.
(2) Includes current portion of operating lease liabilities included in other current liabilities.
The Company’s results from transactions with its related parties for each of the three months ended September 30, 2023 and 2022, are as follows (in thousands):
Ablecom Compuware Corporate Venture Total
Three months ended September 30,
Three months ended September 30,
Three months ended September 30,
Three months ended September 30,
2023 2022 2023 2022 2023 2022 2023 2022
Net sales $ 2 $ 2 $ 16,606 $ 13,760 $ 788 $ 11,293 $ 17,396 $ 25,055
Purchases - inventory $ 46,614 $ 47,847 $ 66,493 $ 48,689 $ — $ — 113,107 96,536
Purchases - other miscellaneous items $ 4,759 $ 4,763 $ 417 $ 258 $ — $ — $ 5,176 $ 5,021
The Company’s cash flow impact from transactions with its related parties for each of the three months ended September 30, 2023 and 2022, are as follows (in thousands):
Ablecom Compuware Corporate Venture Total
Three months ended September 30,
Three months ended September 30,
Three months ended September 30,
Three months ended September 30,
2023 2022 2023 2022 2023 2022 2023 2022
Changes in accounts receivable $ ( 2 ) $ — $ 2,436 $ ( 478 ) $ 1,704 $ ( 1,373 ) $ 4,138 $ ( 1,851 )
Changes in other receivable $ 558 $ 1,276 $ 2,269 $ ( 11,415 ) $ — $ — $ 2,827 $ ( 10,139 )
Changes in accounts payable $ 8,765 $ 664 $ ( 5,784 ) $ 6,010 $ — $ — $ 2,981 $ 6,674
Changes in accrued liabilities $ ( 745 ) $ ( 1,532 ) $ 3,232 $ 11,117 $ — $ — $ 2,487 $ 9,585
Changes in other long-term liabilities $ — $ — $ ( 80 ) $ ( 105 ) $ — $ — $ ( 80 ) $ ( 105 )
Purchases of property, plant and equipment $ 782 $ 583 $ 44 $ 146 $ — $ — $ 826 $ 729
Unpaid property, plant and equipment $ 3,672 $ 3,782 $ — $ — $ — $ — $ 3,672 $ 3,782
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 9. Stock-based Compensation and Stockholders’ Equity
Equity Incentive Plan
On June 5, 2020, the stockholders of the Company approved the 2020 Equity and Incentive Compensation Plan (the “Original 2020 Plan”). The maximum number of shares available under the Original 2020 Plan is 5,000,000 plus 1,045,000 shares of common stock that remained available for future awards under the 2016 Equity Incentive Plan (the “2016 Plan”), at the time of adoption of the Original 2020 Plan. No other awards can be granted under the 2016 Plan and 7,246,000 shares of common stock remain reserved for outstanding awards issued under the Original 2016 Plan at the time of adoption of the Original 2020 Plan. On May 18, 2022, the stockholders of the Company approved an amendment and restatement of the Original 2020 Plan (as amended and restated, the “2020 Plan”) which, among other things, increased the number of shares available for award under the 2020 Plan by an additional 2,000,000 shares.
Under the 2020 Plan, the Company can grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and certain other awards, including those denominated or payable in, or otherwise based on, the Company’s common stock. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10 % of the Company’s outstanding voting stock at the time of grant cannot be less than 110 % of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100 % of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years ; 25 % at the end of one year and one sixteenth per quarter thereafter.
As of September 30, 2023, the Company had 1,324,299 authorized shares available for future issuance under the 2020 Plan.
Common Stock Repurchase and Retirement
On August 3, 2022, after the expiration of a prior share repurchase program on July 31, 2022, a duly authorized subcommittee of the Company’s Board approved a new share repurchase program to repurchase shares of the Company’s 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. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
No shares were repurchased under the share repurchase program during the three months ended September 30, 2023. As of September 30, 2023, $ 50.0 million was available for additional repurchases of common stock.
Determining Fair Value
The Company’s fair value of RSUs and PRSUs is based on the closing market price of the Company’s common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing model. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The key inputs in using the Black-Scholes-option-pricing model were as follows:
Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company’s historical experience.
Expected Volatility—Expected volatility is based on the Company’s implied and historical volatility.
Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
The fair value of stock option grants for the three months ended September 30, 2023 and 2022 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended
September 30,
2023 2022
Risk-free interest rate 4.15 % - 4.32 %
2.81 % - 4.06 %
Expected term 3.00 years - 5.99 years
6.07 years
Dividend yield — % — %
Volatility 56.87 % - 58.27 %
50.62 % - 51.30 %
Weighted-average fair value $ 188.29 $ 28.67
The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended
September 30,
2023 2022
Cost of sales $ 5,904 $ 884
Research and development 35,710 6,118
Sales and marketing 5,665 809
General and administrative 10,100 3,203
Stock-based compensation expense before taxes 57,379 11,014
Income tax impact ( 16,049 ) ( 1,339 )
Stock-based compensation expense, net $ 41,330 $ 9,675
As of September 30, 2023, $ 65.4 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.65 years and $ 203.1 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.67 years. Additionally, as described below, $ 0.5 million of unrecognized compensation cost related to the 2021 CEO Performance Stock Option is expected to be recognized over a period of 0.5 years.
Stock Option Activity
In March 2021, the Company’s Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the grant of a stock option award for 1,000,000 shares of common stock to the Company’s CEO (the “2021 CEO Performance Stock Option”). The 2021 CEO Performance Stock Option has five vesting tranches with a vesting schedule based entirely on the attainment of operational milestones (performance conditions) and market conditions, assuming (1) continued employment either as the CEO or in such capacity as agreed upon between the Company’s CEO and the Board and (2) service through each vesting date. Each of the five vesting tranches of the 2021 CEO Performance Stock Option will vest upon certification by the Compensation Committee that both (i) the market price milestone for such tranche, which begins at $ 45.00 per share for the first tranche and increases up to $ 120.00 per share thereafter (based on a 60 trading day average stock price), has been achieved, and (ii) any one of five operational milestones focused on total revenue, as reported under U.S. GAAP, have been achieved for the previous four consecutive fiscal quarters. Upon vesting and exercise, including the payment of the exercise price of $ 45.00 per share, prior to March 2, 2024, the Company’s CEO must hold shares that he acquires until March 2, 2024, other than those shares sold pursuant to a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The achievement status of the operational and stock price milestones as of September 30, 2023 was as follows:
Annualized Revenue Milestone (in billions) Achievement Status Stock Price Milestone Achievement Status
$ 4.0 Achieved $ 45 Achieved (1)
$ 4.8 Achieved $ 60 Achieved (2)
$ 5.8 Achieved $ 75 Achieved (3)
$ 6.8 Achieved $ 95 Achieved (4)
$ 8.0 Probable $ 120 Achieved (5)
(1) The vesting of the first tranche of 200,000 option shares under the 2021 CEO Performance Stock Option, representing one-fifth of such award, was certified by the Company ’ s Compensation Committee in August 2022.
(2) The vesting of the second tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company ’ s Compensation Committee in October 2022.
(3) The vesting of the third tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company ’ s Compensation Committee in January 2023.
(4) The vesting of the fourth tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company ’ s Compensation Committee in September 2023.
(5) On June 19, 2023, the Compensation Committee certified achievement of the $ 120 stock price milestone based upon the 60 trading day average stock price from March 6, 2023 through May 30, 2023.
On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed expense amount for such tranche and (ii) the future time when the market price milestone for such tranche was expected to be achieved, or its “expected market price milestone achievement time.” Separately, based on a subjective assessment of the Company’s future financial performance, each quarter, the Company will determine whether achievement is probable for each operational milestone that has not previously been achieved or deemed probable of achievement, and, if so, the future time when the Company expects to achieve that operational milestone, or its “expected operational milestone achievement time.” When the Company first determines that an operational milestone has become probable of being achieved, the Company will allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market price milestone achievement time (if the related market price milestone has not yet been achieved). The Company will immediately recognize a catch-up expense for all accumulated expenses from the grant date through the quarter in which the operational milestone was first deemed probable of being achieved. Each quarter thereafter, the Company will recognize the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected vesting time, except that upon vesting of a tranche, all remaining expenses for that tranche will be immediately recognized.
During the three months ended September 30, 2023 and 2022, the Company recognized compensation expense related to the 2021 CEO Performance Stock Option of $ 0.2 million and $ 1.3 million, respectively. As of September 30, 2023 and June 30, 2023, the Company had $ 0.5 million and $ 0.7 million, respectively, in unrecognized compensation cost related to the 2021 CEO Performance Stock Option. The unrecognized compensation cost as of September 30, 2023 is expected to be recognized over a period of 0.5 years.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table summarizes stock option activity during the three months ended September 30, 2023 under all plans:
Options
Outstanding Weighted
Average
Exercise
Price per
Share Weighted
Average
Remaining
Contractual
Term (in Years)
Balance as of June 30, 2023 3,302,533 $ 40.47
Granted 246,612 $ 330.42
Exercised ( 188,957 ) $ 23.87
Forfeited/Cancelled ( 4,041 ) $ 50.83
Balance as of September 30, 2023 3,356,147 $ 62.71 6.66
Options vested and exercisable at September 30, 2023 2,092,330 $ 34.42 5.47
RSU and PRSU Activity
The following table summarizes RSU and PRSU activity during the three months ended September 30, 2023 under all plans:
Time-Based RSUs
Outstanding Weighted
Average
Grant-Date Fair Value per Share
Balance as of June 30, 2023 2,042,986 $ 55.94
Granted 464,468 $ 334.93
Released ( 297,656 ) $ 262.41
Forfeited ( 31,724 ) $ 91.38
Balance as of September 30, 2023 2,178,074 $ 104.49
SMCI | Q1 2024 Form 10-Q | 24
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 10. Income Taxes
The Company recorded a provision for income taxes of $ 20.2 million and $ 38.9 million for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 11.4 % and 17.4 % for the three months ended September 30, 2023 and 2022, respectively. 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 an increase in the tax deduction for stock compensation in the three months ended September 30, 2023.
The Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development (“R&D”) expenses in the year incurred and instead requires taxpayers to capitalize R&D expenses, including software development cost, and subsequently amortize such expenses over five years for R&D activities conducted in the United States and over fifteen years for R&D activities conducted outside of the United States beginning in the Company's fiscal year 2023. Although Congress has considered legislation that would defer, modify, and repeal the capitalization and amortization requirement, there is no assurance the provision will be deferred, repealed, or otherwise modified.
The Company believes that it has adequately provided reserves for all uncertain tax positions; however, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved.
In general, the federal statute of limitations remains open for tax years ended June 30, 2020 through 2023. Various states’ statutes of limitations remain open in general for tax years ended June 30, 2019 through 2023. Certain statutes of limitations in major foreign jurisdictions remain open for the tax years ended June 30, 2018 through 2023. It is reasonably possible that the Company’s gross unrecognized tax benefits will decrease by approximately $ 3.2 million, in the next 12 months, due to the lapse of the statute of limitations. These adjustments, if recognized, would positively impact the Company’s effective tax rate, and would be recognized as additional tax benefits.
Note 11. Commitments and Contingencies
Legal proceedings and indemnifications
From time to time, the Company has been involved in various legal proceedings arising from the normal course of business activities. The resolution of any such matters have not had a material impact on the Company’s consolidated financial condition, results of operations or liquidity as of September 30, 2023 and any prior periods.
The Company has entered into indemnification agreements with its current and former directors and executive officers.
Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
Purchase Commitments — The Company has agreements to purchase inventory and non-inventory items primarily through the next 12 months. As of September 30, 2023, these remaining noncancelable commitments were $ 1.4 billion, including $ 66.4 million for related parties.
Note 12. Segment Reporting
The Company operates in one operating segment that develops and provides high-performance server solutions based upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief Executive Officer.
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following is a summary of property, plant and equipment, net (in thousands):
September 30, June 30,
2023 2023
Long-lived assets:
United States $ 183,685 $ 183,485
Asia 105,405 104,094
Europe 2,579 2,661
$ 291,669 $ 290,240
The Company’s revenue is presented on a disaggregated basis in Part I, Item 1, Note 2, “Revenue,” by type of product and by geographical market.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.