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Super Micro Computer Inc. Reports Operating Results (10-Q)

November 08, 2010 | About:
10qk

10qk

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Super Micro Computer Inc. (SMCI) filed Quarterly Report for the period ended 2010-09-30.

Super Micro Computer Inc. has a market cap of $425.44 million; its shares were traded at around $11.4 with a P/E ratio of 15.41 and P/S ratio of 0.59. SMCI is in the portfolios of RS Investment Management, Steven Cohen of SAC Capital Advisors, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

We sell our server systems and subsystems and accessories primarily through distributors and to a lesser extent to OEMs as well as through our direct sales force. We derived approximately 60.2% and 68.1% of our net sales from products sold to distributors, and 39.8% and 31.9% from sales to OEMs and to end customers for the three months ended September 30, 2010 and 2009, respectively. None of our customers accounted for 10% or more of our net sales in the three months ended September 30, 2010 and 2009. We derived approximately 58.7% and 63.0% of our net sales from customers in the United States for the three months ended September 30, 2010 and 2009, respectively. We derived approximately 41.3% and 37.0% of our net sales from customers outside the United States for the three months ended September 30, 2010 and 2009, respectively.

Impairment of short-term and long-term investments. Impairment of short-term and long-term investments relates to the unrealized loss on the carrying value of our investments in auction rate securities; such securities were rated AAA at the date of purchase. The liquidity and fair value of these securities has been negatively impacted by the uncertainty in the credit markets and exposure of these securities to the financial condition of bond insurance companies. We have received all interest payments due on these instruments on a timely basis. Each of these securities has been subject to auction processes for which there had been insufficient bidders on the scheduled rollover dates and the auctions have subsequently failed. When these securities lost the short-term liquidity previously provided by the auction processes, we reclassified these securities as long-term investments. For the securities with the stated maturity less than a year, the securities were classified as short-term available-for-sale investments. We have used a discounted cash flow model to estimate the fair value of these investments as of September 30, 2010 and June 30, 2010. The material factors used in preparing the discounted cash flow model are 1) the discount rate utilized to present value the cash flows, 2) the time period until redemption and 3) the estimated rate of return. Management derives the estimates by obtaining input from market data on the applicable discount rate, estimated time to maturity and estimated rate of return. The changes in fair value have been primarily due to changes in the estimated rate of return and a change in the estimated period to liquidity. The fair value of our investment portfolio may change between 1% to 3% by increasing or decreasing the rate of return used by 1% or by increasing or decreasing the term used by 1 year. Changes in these estimates or in the market conditions for these investments are likely in the future based upon the then current market conditions for these investments and may affect the fair value of these investments. The accumulated unrealized loss as of September 30, 2010 and June 30, 2010 was $204,000, net of deferred income taxes, on the securities. We deem this loss to be temporary as we determined that we will not likely be required to sell the securities before their anticipated recovery and we have the intent and ability to hold our investments until recovery of cost.

Net sales. Net sales increased by $58.7 million, or 39.5%, to $207.2 million from $148.5 million, for the three months ended September 30, 2010 and 2009, respectively. This increase was due primarily to an increase in average selling prices of server systems and an increase in unit volumes of server systems and subsystems and accessories. For the three months ended September 30, 2010, the approximate number of server system units sold increased 35.1% to 50,000 compared to 37,000 for the three months ended September 30, 2009. The average selling price of server system units increased 7.1% to approximately $1,500 in the three months ended September 30, 2010 compared to approximately $1,400 in the three months ended September 30, 2009. The average selling prices of our server systems increased principally due to higher average selling prices of 6000 and 7000 Series configuration of servers which incorporated additional features such as higher density, memory and hard disk drive capacity. Sales of server systems increased by $22.8 million or 44.6% from the three months ended September 30, 2009 to the three months ended September 30, 2010, primarily due to higher sales of 6000 and 7000 Series configuration of servers including 2U Twin, 2U Twin², GPU and storage solutions and higher sales to OEM and end customers. Sales of server systems represented 35.7% of our net sales for the three months ended September 30, 2010 as compared to 34.5% of our net sales for the three months ended September 30, 2009. For the three months ended September 30, 2010, the approximate number of subsystems and accessories units sold increased 44.8% to 950,000 compared to 656,000 for the three months ended September 30, 2009. Sales of subsystems and accessories units increased by $35.8 million or 36.8% from the three months ended September 30, 2009 to the three months ended September 30, 2010, primarily due to higher sales to distributors, resellers and system integrators who increasingly are purchasing additional accessories from us and completing the final assembly themselves. Sales of subsystems and accessories represented 64.3% of our net sales for the three months ended September 30, 2010 as compared to 65.5% of our net sales for the three months ended September 30, 2009. We believe that the increase in our net sales in the three months ended September 30, 2010 was primarily attributable to the continuing improvement in the global economy. As a result, the amount of the percentage increases do not reflect a trend expected to continue in future periods. For the three months ended September 30, 2010 and 2009, we derived approximately 60.2% and 68.1%, respectively, of our net sales from products sold to distributors and we derived approximately 39.8% and 31.9%, respectively, from sales to OEMs and to end customers. For the three months ended September 30, 2010, customers in the United States, Europe, and Asia accounted for approximately 58.7%, 22.4% and 15.7%, of our net sales, respectively, as compared to 63.0%, 20.4% and 13.5%, respectively, for the three months ended September 30, 2009.

Cost of sales. Cost of sales increased by $50.1 million, or 40.4%, to $174.1 million from $124.0 million, for the three months ended September 30, 2010 and 2009, respectively. Cost of sales as a percentage of net sales was 84.1% and 83.5% for the three months ended September 30, 2010 and 2009, respectively. The increase in absolute dollars of cost of sales was primarily attributable to the increase in net sales, an increase of $2.6 million in freight-in charges associated with our growth in volume of products shipped at higher peak season rates, an increase of $1.1 million in our overseas production overhead and an increase of $1.0 million in provision for warranty reserve offset in part by a decrease of $0.4 million in provision for inventory reserve. The higher cost of sales as a percentage of net sales was primarily due to a higher percentage of sales from server systems to OEM and system integrators as we bundled additional features such as memories and hard disk drives into our server systems as well as a higher percentage of sales to internet data centers. In the three months ended September 30, 2010, we recorded a $2.6 million expense, or 1.3% of net sales, related to the provision for warranty reserve as compared to $1.6 million, or 1.1% of net sales, in the three months ended September 30, 2009. The increase in the provision for warranty reserve was primarily due to higher net sales in the three months ended September 30, 2010. If in future periods we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or a change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or less than expected, our gross margin would be affected. In the three months ended September 30, 2010, we recorded a $0.1 million benefit, or 0.0% of net sales, related to the inventory provision as compared to $0.3 million expense, or 0.2% of net sales, in the three months ended September 30, 2009. The decrease in the inventory provision was primarily due to an increase sales of our previously reserved inventory in the three months ended September 30, 2010.

Research and development expenses. Research and development expenses increased by $1.8 million, or 21.1%, to $10.4 million from $8.6 million for the three months ended September 30, 2010 and 2009, respectively. Research and development expenses were 5.0% and 5.8% of net sales for the three months ended September 30, 2010 and 2009, respectively. The increase in absolute dollars was primarily due to an increase of $1.9 million in compensation and benefits, including higher stock-based compensation expense, resulting from growth in research and development personnel to support the expansion of our operations of our headquarter and operations in the Netherlands and Taiwan and an increase of $0.5 million in development costs associated with new products. These increases were partially offset by an increase of $0.7 million in non-recurring engineering funding from certain suppliers and customers.

General and administrative expenses. General and administrative expenses increased by $0.6 million, or 15.1%, to $4.4 million from $3.8 million, for the three months ended September 30, 2010 and 2009, respectively. General and administrative expenses were 2.1% and 2.6% of net sales for three months ended September 30, 2010 and 2009, respectively. The increase in absolute dollars was primarily due to an increase of $0.4 million in compensation and bRead the The complete Report

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