Super Micro Computer Inc. (SMCI, Financial) filed Quarterly Report for the period ended 2009-09-30.
Super Micro ComputerInc. designsdevelopsmanufactures and sells energy-efficientapplication optimized server solutions based on the x86 architecture. The Company's solutions include a range of rack mount and blade server systemsas well as components. Supermicro emphasizes superior product design and uncompromising quality control to produce industry-leading serverboardschassis and server systems. These Server Building Block Solutions provide benefits across many environmentsincluding data center deploymenthigh-performance computinghigh-end workstationsstorage networks and standalone server installations. Super Micro Computer sells its server systems and components primarily through distributorswhich include value-added resellers and system integratorsand to a lesser extentto original equipment manufacturers (OEMs). Super Micro ComputerInc. is headquartered in San JoseCalifornia. Super Micro Computer Inc. has a market cap of $308.81 million; its shares were traded at around $8.87 with a P/E ratio of 25.34 and P/S ratio of 0.61.
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. We have used a discounted cash flow model to estimate the fair value of these investments as of September 30, 2009 and June 30, 2008. 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 September 30, 2009 and June 30, 2009 we have recorded an accumulative unrealized loss of $596,000 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 to hold our investments until recovery of cost.
Net sales. Net sales increased by $4.5 million, or 3.1%, to $148.5 million from $144.1 million, for the three months ended September 30, 2009 and 2008, respectively. This increase was due primarily to an increase in the average selling price of server system, subsystems and accessories, partially offset by a decrease in unit volumes of server systems and an increase in subsystems and accessories revenue resulting from increasing in the sales to distributors and resellers. For the three months ended September 30, 2009, the approximate number of server system units sold decreased 17.8% to 37,000 compared to 45,000 for the three months ended September 30, 2008. The average selling price of server system units increased 7.7% to approximately $1,400 in the three months ended September 30, 2009 compared to approximately $1,300 in the three months ended September 30, 2008. The average selling prices of our server systems increased principally due to higher average selling prices of 6000 Series configuration of servers. Sales of server systems decreased by $4.6 million or 8.3% from the three months ended September 30, 2008 to the three months ended September 30, 2009, primarily due to lower sales to OEM and end customers. Sales of server systems represented 34.5% of our net sales for the three months ended September 30, 2009 as compared to 38.7% of our net sales for the three months ended September 30, 2008. We believe that the increase in our net sales in the three months ended September 30, 2009 was primarily attributable to the continuing improvement in the global economy. For the three months ended September 30, 2009 and 2008, we derived approximately 68.1% and 62.6%, respectively, of our net sales from products sold to distributors and we derived approximately 31.9% and 37.4%, respectively, from sales to OEMs and to end customers. For the three months ended September 30, 2009, customers in the United States, Asia, Germany and rest of Europe accounted for approximately 63.0%, 13.5%, 4.6% and 15.8%, of our net sales, respectively, as compared to 66.2%, 11.3%, 5.2% and 15.6%, respectively, for the three months ended September 30, 2008.
Cost of sales. Cost of sales increased by $7.8 million, or 6.7%, to $124.0 million from $116.2 million, for the three months ended September 30, 2009 and 2008, respectively. Cost of sales as a percentage of net sales was 83.5% and 80.7% for the three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollars of cost of sales was primarily attributable to the increase in net sales offset in part by a decrease of $0.7 million in freight-in charges and a decrease of $0.5 million in provision for warranty reserve. The higher cost of sales as a percentage of net sales was primarily due to a decrease in standard gross margin as a result of lower margins across our product lines as we grew market share during the economic downturn. In the three months ended September 30, 2009, we recorded a $1.6 million expense, or 1.1% of net sales, related to the provision for warranty reserve as compared to $2.0 million, or 1.4% of net sales, in the three months ended September 30, 2008. The decrease in the provision for warranty reserve was primarily due to lower repair costs in the three months ended September 30, 2009. If in future periods we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, our gross margin would be affected.
Research and development expenses. Research and development expenses increased by $0.5 million, or 6.7%, to $8.6 million from $8.1 million for the three months ended September 30, 2009 and 2008, respectively. Research and development expenses were 5.8% and 5.6% of net sales for the three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollars and percentage of net sales was primarily due to a decrease of $0.5 million in non-recurring engineering funding from certain suppliers and an increase of $0.4 million in compensation and benefits resulting from growth in research and development personnel.
General and administrative expenses. General and administrative expenses increased by $0.6 million, or 20.4%, to $3.8 million from $3.1 million, for the three months ended September 30, 2009 and 2008, respectively. General and administrative expenses were 2.6% and 2.2% of net sales for three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollar and percentage of net sales was primarily due to an increase of $0.3 million in compensation and benefits.
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Super Micro ComputerInc. designsdevelopsmanufactures and sells energy-efficientapplication optimized server solutions based on the x86 architecture. The Company's solutions include a range of rack mount and blade server systemsas well as components. Supermicro emphasizes superior product design and uncompromising quality control to produce industry-leading serverboardschassis and server systems. These Server Building Block Solutions provide benefits across many environmentsincluding data center deploymenthigh-performance computinghigh-end workstationsstorage networks and standalone server installations. Super Micro Computer sells its server systems and components primarily through distributorswhich include value-added resellers and system integratorsand to a lesser extentto original equipment manufacturers (OEMs). Super Micro ComputerInc. is headquartered in San JoseCalifornia. Super Micro Computer Inc. has a market cap of $308.81 million; its shares were traded at around $8.87 with a P/E ratio of 25.34 and P/S ratio of 0.61.
Highlight of Business Operations:
We sell our server systems and systems primarily through distributors and to a lesser extent to OEMs as well as through our direct sales force. We derived approximately 68.1% and 62.6% of our net sales from products sold to distributors, and 31.9% and 37.4% from sales to OEMs and to end customers for the three months ended September 30, 2009 and 2008, respectively. None of our customers accounted for 10% or more of our net sales in three months ended September 30, 2009 and 2008. We derived approximately 63.0% and 66.2% of our net sales from customers in the United States for the three months ended September 30, 2009 and 2008, respectively. We derived approximately 37.0% and 33.8% of our net sales from customers outside the United States for the three months ended September 30, 2009 and 2008, 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. We have used a discounted cash flow model to estimate the fair value of these investments as of September 30, 2009 and June 30, 2008. 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 September 30, 2009 and June 30, 2009 we have recorded an accumulative unrealized loss of $596,000 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 to hold our investments until recovery of cost.
Net sales. Net sales increased by $4.5 million, or 3.1%, to $148.5 million from $144.1 million, for the three months ended September 30, 2009 and 2008, respectively. This increase was due primarily to an increase in the average selling price of server system, subsystems and accessories, partially offset by a decrease in unit volumes of server systems and an increase in subsystems and accessories revenue resulting from increasing in the sales to distributors and resellers. For the three months ended September 30, 2009, the approximate number of server system units sold decreased 17.8% to 37,000 compared to 45,000 for the three months ended September 30, 2008. The average selling price of server system units increased 7.7% to approximately $1,400 in the three months ended September 30, 2009 compared to approximately $1,300 in the three months ended September 30, 2008. The average selling prices of our server systems increased principally due to higher average selling prices of 6000 Series configuration of servers. Sales of server systems decreased by $4.6 million or 8.3% from the three months ended September 30, 2008 to the three months ended September 30, 2009, primarily due to lower sales to OEM and end customers. Sales of server systems represented 34.5% of our net sales for the three months ended September 30, 2009 as compared to 38.7% of our net sales for the three months ended September 30, 2008. We believe that the increase in our net sales in the three months ended September 30, 2009 was primarily attributable to the continuing improvement in the global economy. For the three months ended September 30, 2009 and 2008, we derived approximately 68.1% and 62.6%, respectively, of our net sales from products sold to distributors and we derived approximately 31.9% and 37.4%, respectively, from sales to OEMs and to end customers. For the three months ended September 30, 2009, customers in the United States, Asia, Germany and rest of Europe accounted for approximately 63.0%, 13.5%, 4.6% and 15.8%, of our net sales, respectively, as compared to 66.2%, 11.3%, 5.2% and 15.6%, respectively, for the three months ended September 30, 2008.
Cost of sales. Cost of sales increased by $7.8 million, or 6.7%, to $124.0 million from $116.2 million, for the three months ended September 30, 2009 and 2008, respectively. Cost of sales as a percentage of net sales was 83.5% and 80.7% for the three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollars of cost of sales was primarily attributable to the increase in net sales offset in part by a decrease of $0.7 million in freight-in charges and a decrease of $0.5 million in provision for warranty reserve. The higher cost of sales as a percentage of net sales was primarily due to a decrease in standard gross margin as a result of lower margins across our product lines as we grew market share during the economic downturn. In the three months ended September 30, 2009, we recorded a $1.6 million expense, or 1.1% of net sales, related to the provision for warranty reserve as compared to $2.0 million, or 1.4% of net sales, in the three months ended September 30, 2008. The decrease in the provision for warranty reserve was primarily due to lower repair costs in the three months ended September 30, 2009. If in future periods we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, our gross margin would be affected.
Research and development expenses. Research and development expenses increased by $0.5 million, or 6.7%, to $8.6 million from $8.1 million for the three months ended September 30, 2009 and 2008, respectively. Research and development expenses were 5.8% and 5.6% of net sales for the three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollars and percentage of net sales was primarily due to a decrease of $0.5 million in non-recurring engineering funding from certain suppliers and an increase of $0.4 million in compensation and benefits resulting from growth in research and development personnel.
General and administrative expenses. General and administrative expenses increased by $0.6 million, or 20.4%, to $3.8 million from $3.1 million, for the three months ended September 30, 2009 and 2008, respectively. General and administrative expenses were 2.6% and 2.2% of net sales for three months ended September 30, 2009 and 2008, respectively. The increase in absolute dollar and percentage of net sales was primarily due to an increase of $0.3 million in compensation and benefits.
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