Business Context and Reporting Period
Company: Super Micro Computer, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011 (Third Quarter of Fiscal Year 2011)
Business Overview: A global leader in server technology and green computing, developing high-performance server solutions, subsystems, and accessories based on modular, open-standard architecture. Operations are located in San Jose, California, the Netherlands, and Taiwan.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2011 |
Three Months Ended Mar 31, 2010 |
Nine Months Ended Mar 31, 2011 |
Nine Months Ended Mar 31, 2010 |
|---|---|---|---|---|
| Net Sales | $234,288 | $189,276 | $682,279 | $519,774 |
| Gross Profit | $37,856 | $29,265 | $111,072 | $84,083 |
| Gross Margin | 16.2% | 15.5% | 16.3% | 16.2% |
| Operating Income | $15,158 | $10,534 | $44,091 | $29,361 |
| Net Income | $10,696 | $7,733 | $29,482 | $19,200 |
| Diluted EPS | $0.25 | $0.18 | $0.69 | $0.47 |
| Cash & Equivalents | $68,096 | $72,644 (Jun 30, 2010) | N/A | |
| Total Debt (Outstanding) | $28,102 | $18,553 (Jun 30, 2010) | N/A | |
| Inventory | $205,641 | $135,584 (Jun 30, 2010) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23.8% quarter-over-quarter (QoQ) and 31.3% year-over-year (YoY) for the nine-month period. Growth was driven by increased unit volumes in server systems and subsystems, particularly SuperBlade, GPU, and storage solutions.
- Profitability: Net income rose 38.3% QoQ and 53.6% YoY (nine months). The increase was attributed to higher gross profit from sales volume and a lower effective tax rate due to the reinstatement of federal R&D tax credits.
- Inventory Build: Inventory increased significantly to $205.6 million (from $135.6 million at fiscal year-end 2010). Management cited preparation for anticipated Q4 growth, expansion of overseas manufacturing, and strategic stockpiling to mitigate supply chain disruptions from the Japan earthquake.
- Debt Structure: Total outstanding borrowings increased to $28.1 million. The company obtained a new term loan of $13.9 million in December 2010 to pay down a line of credit used for building purchases and drew an additional $9.7 million in March 2011 for a land deposit in Taiwan.
- Operating Expenses: R&D expenses increased 25.1% QoQ due to personnel growth and development of new X9 generation server boards. Sales and marketing expenses rose 18.6% QoQ.
Guidance, Outlook, and Risks
- Capital Expenditures: The company plans to spend approximately $23.4 million over the next 12 months to construct manufacturing facilities in Taiwan and expand its San Jose headquarters. Funding is expected to come from operating cash flows and additional bank financing.
- Supply Chain Risks: The recent earthquake and tsunami in Japan have disrupted the global supply chain for components. While inventory levels were increased to mitigate this risk, future shortages could impact product availability.
- Liquidity Risk (Auction Rate Securities): The company holds $5.4 million in auction rate securities classified as long-term investments. These are currently illiquid; if the company needs to access these funds before a liquid market develops, it may incur a loss of principal. An accumulated unrealized loss of $0.2 million is recorded.
- Related Party Transactions: A significant portion of manufacturing is outsourced to Ablecom Technology Inc., a related party. Purchases from Ablecom represented 20.3% of cost of sales for the quarter. Conflicts of interest exist due to family ties between the Liang families (Supermicro and Ablecom leadership).
- Legal Proceedings: A lawsuit with Digitechnic, S.A. was settled in December 2009 with a payment of $1.1 million. No material litigation provisions were recorded in the current period.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory reserves given the $70 million increase in inventory levels and the risk of obsolescence in the fast-moving server market.
- Related Party Pricing: Assess whether pricing terms with Ablecom (a related party) are consistent with arm's-length transactions, given the significant volume of purchases.
- Debt Covenants: Confirm continued compliance with financial covenants on the $25 million revolving line of credit and the new term loan.
- Japan Supply Chain Impact: Monitor the actual impact of the Japan earthquake on component availability and potential cost increases, despite the company's inventory buffer.
- Auction Rate Securities: Track the liquidity status of the $5.4 million investment in auction rate securities and any potential future impairment charges.