Business Context and Reporting Period
Company: Super Micro Computer, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010 (Third Quarter of Fiscal Year 2010)
Business Overview: A global leader in server technology and green computing innovation, developing high-performance server solutions based on modular, open-standard architecture. The company operates in a single segment, selling server systems, subsystems, and accessories primarily through distributors and OEMs.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2010 | Nine Months Ended Mar 31, 2010 | Three Months Ended Mar 31, 2009 | Nine Months Ended Mar 31, 2009 |
|---|---|---|---|---|
| Net Sales | $189,276 | $519,774 | $109,540 | $382,156 |
| Gross Profit | $29,265 | $84,083 | $16,327 | $68,255 |
| Gross Margin % | 15.5% | 16.2% | 14.9% | 17.9% |
| Operating Income | $10,534 | $29,361 | $415 | $19,529 |
| Net Income | $7,733 | $19,200 | $1,231 | $13,749 |
| Diluted EPS | $0.18 | $0.47 | $0.03 | $0.35 |
| Cash & Equivalents (Balance Sheet) | $66,731 (as of Mar 31, 2010) | |||
| Inventory (Balance Sheet) | $144,412 (as of Mar 31, 2010) | |||
| Accounts Receivable (Net) | $63,868 (as of Mar 31, 2010) | |||
| Total Debt | $78 (Capital leases only; long-term building loans repaid in FY2009) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 72.8% year-over-year for the quarter and 36.0% for the nine-month period, driven by higher unit volumes of subsystems/accessories and increased average selling prices for server systems (specifically the 6000 Series).
- Profitability: Net income surged 528% for the quarter and 39.7% for the nine-month period compared to the prior year. Operating income improved significantly from $415,000 to $10.5 million for the quarter.
- Working Capital: Inventory increased significantly to $144.4 million (from $90.0 million at June 30, 2009) to support business growth. Accounts receivable rose to $63.9 million. Consequently, operating cash flow turned negative at $(8.2) million for the nine months ended March 31, 2010, compared to positive $13.4 million in the prior year period, due to the buildup of inventory and receivables.
- Debt Reduction: The company repaid all outstanding building loans ($10.0 million) during the nine-month period, leaving only minimal capital lease obligations.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: A provision for litigation loss of $1.1 million was recorded in the nine months ended March 31, 2010, related to a lawsuit with Digitechnic, S.A. The matter was settled in December 2009 with a payment of $1.055 million.
- Investment Liquidity Risk: The company holds approximately $6.4 million in auction rate securities (ARS) classified as long-term investments. These securities have failed to auction since February 2008, rendering them illiquid. While deemed temporarily impaired with an unrealized loss of $0.4 million, the company may not be able to access these funds without a loss of principal if needed.
- Related Party Transactions: Significant reliance on Ablecom Technology Inc. (a related party) for contract manufacturing. Purchases from Ablecom represented 19.9% of cost of sales for the quarter. Outstanding payables to Ablecom were $35.5 million.
- Subsequent Event: In May 2010, the company entered an agreement to purchase land and buildings in San Jose, California, for approximately $18.5 million, expected to close in June 2010. Financing is expected to be obtained for this purchase.
- Outlook: Management anticipates continued growth in working capital requirements to support expansion. Interest expenses are expected to increase in the future due to planned financing for property acquisitions.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory reserves given the $54.4 million increase in inventory levels and the risk of obsolescence in the fast-moving server market.
- Auction Rate Securities: Assess the liquidity risk associated with the $6.4 million investment in illiquid auction rate securities and the potential for future impairment charges.
- Related Party Pricing: Review the terms of the agreement with Ablecom Technology Inc. to ensure pricing is consistent with arm's-length transactions, given the significant volume of purchases.
- Cash Flow Sustainability: Monitor the trend of negative operating cash flow caused by working capital buildup and the company's ability to fund operations and the upcoming $18.5 million property purchase without dilutive equity or excessive debt.
- Legal Contingencies: Confirm that the Digitechnic litigation settlement is fully resolved with no further financial exposure.