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

May 07, 2010 | About:
10qk

10qk

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Super Micro Computer Inc. (SMCI) filed Quarterly Report for the period ended 2010-03-31.

Super Micro Computer Inc. has a market cap of $471.5 million; its shares were traded at around $13.13 with a P/E ratio of 23.9 and P/S ratio of 1. SMCI is in the portfolios of RS Investment Management, Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC.

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 69.4% and 68.7% of our net sales from products sold to distributors, and 30.6% and 31.3% from sales to OEMs and to end customers for the three and nine months ended March 31, 2010, respectively. We derived approximately 65.9% and 64.8% of our net sales from products sold to distributors, and 34.1% and 35.2% from sales to OEMs and to end customers for the three and nine months ended March 31, 2009, respectively. None of our customers accounted for 10% or more of our net sales in the three and nine months ended March 31, 2010 and 2009. We derived approximately 59.4% and 59.8% of our net sales from customers in the United States for the three and nine months ended March 31, 2010, respectively, and approximately 59.8% and 64.0% of our net sales from customers in the United States for the three and nine months ended March 31, 2009, respectively. We derived approximately 40.6% and 40.2% of our net sales from customers outside the United States for the three and nine months ended March 31, 2010, respectively and approximately 40.2% and 36.0% of our net sales from customers outside the United States for the three and nine months ended March 31, 2009, respectively.

We perform the majority of our research and development efforts in-house. Research and development expenses represented approximately 5.2% of our net sales for both three and nine months ended March 31, 2010, respectively, compared to approximately 7.8% and 6.8% of our net sales for the three and nine months ended March 31, 2009, respectively.

One of our key suppliers is Ablecom, a related party, which supplies us with contract design and manufacturing support. For the three and nine months ended March 31, 2010, our purchases from Ablecom represented approximately 19.9% and 22.8% of our cost of sales, respectively, compared to approximately 18.1% and 23.1% of our cost of sales for the three and nine months ended March 31, 2009, respectively. The increase in percentage of cost of sales in the three months ended March 31, 2010 was primarily related to a higher volume of chassis purchases from Ablecom in the three months ended March 31, 2010 in order to support our growth. The decrease in percentage of cost of sales in the nine months ended March 31, 2010 was primarily related to higher product mix of subsystems and accessories which were purchased from other suppliers in the nine months ended March 31, 2010. Ablecoms sales to us constitute a substantial majority of Ablecoms net sales. We continue to maintain our manufacturing relationship with Ablecom in Asia in an effort to reduce our product costs and do not have any current plans to reduce our reliance on Ablecom product purchases. In addition to providing a larger volume of contract manufacturing services for us, Ablecom continues to warehouse for us a number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the U.S. and Europe. We typically negotiate the price of products that we purchase from Ablecom on a quarterly basis; however, either party may re-negotiate the price of products with each order. As a result of our relationship with Ablecom, it is possible that Ablecom may in the future sell products to us at a price higher or lower than we could obtain from an unrelated third party supplier. This may result in our future reporting of gross profit as a percentage of net sales that is less than or in excess of what we might have obtained absent our relationship with Ablecom.

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 March 31, 2010 and June 30, 2009. 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 2% to 4% 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. As of March 31, 2010 and June 30, 2009 we have recorded an accumulated unrealized loss of $385,000 and $801,000, net of deferred income taxes, on the securities, respectively. 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 $79.7 million, or 72.8%, to $189.3 million from $109.5 million, for the three months ended March 31, 2010 and 2009, respectively. This increase was due primarily to an increase in unit volumes of subsystems and accessories and average selling prices of server systems. For the three months ended March 31, 2010, the approximate number of server system units sold increased 10.3% to 43,000 compared to 39,000 for the three months ended March 31, 2009. The average selling price of server system units increased 36.4% to approximately $1,500 in the three months ended March 31, 2010 compared to approximately $1,100 in the three months ended March 31, 2009. The average selling prices of our server systems increased principally due to higher average selling prices of 6000 Series configuration of servers which incorporated additional features such as higher density, memory and hard disk drive capacity. Sales of server systems increased by $20.7 million or 48.4% from the three months ended March 31, 2009 to the three months ended March 31, 2010, primarily due to higher sales of 6000 Series configuration of servers. Sales of server systems represented 33.6% of our net sales for the three months ended March 31, 2010 as compared to 39.1% of our net sales for the three months ended March 31, 2009. For the three months ended March 31, 2010, the approximate number of subsystems and accessories uni

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