Business Context and Reporting Period
Company: Super Micro Computer, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010 (Second Quarter of Fiscal Year 2011)
Business Overview: A global leader in server technology and green computing innovation, developing high-performance server solutions 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 Dec 31, 2010 | Six Months Ended Dec 31, 2010 | Six Months Ended Dec 31, 2009 |
|---|---|---|---|
| Net Sales | $240,813 | $447,991 | $330,498 |
| Gross Profit | $40,179 | $73,216 | $54,818 |
| Gross Margin | 16.7% | 16.3% | 16.6% |
| Operating Income | $16,924 | $28,933 | $18,827 |
| Net Income | $11,569 | $18,786 | $11,467 |
| Diluted EPS | $0.27 | $0.45 | $0.28 |
| Cash & Equivalents (Dec 31, 2010) | $87,216 | ||
| Total Debt (Current + Long-term) | $18,648 | ||
| Inventory (Dec 31, 2010) | $187,646 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 32.3% year-over-year for the quarter and 35.6% for the six-month period, driven by higher unit volumes and average selling prices for server systems and subsystems.
- Profitability: Net income rose 52.1% for the quarter and 63.8% for the six-month period compared to the prior year. This was driven by increased gross profit and a lower effective tax rate (31.0% vs. 38.2% for the quarter) due to the reinstatement of federal R&D tax credits.
- Inventory Build: Inventory increased significantly to $187.6 million (from $135.6 million at June 30, 2010) to support anticipated sales growth and expanded manufacturing in the Netherlands and Taiwan. Days Sales of Inventory (DSI) increased to 78 days from 67 days.
- Debt Restructuring: The company repaid $13.9 million of its revolving line of credit in December 2010 by securing a new term loan secured by three buildings purchased in San Jose. Total outstanding borrowings remained approximately $18.6 million.
- Operating Expenses: R&D expenses increased 40.5% for the quarter, primarily due to personnel growth and stock-based compensation to support product expansion.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued growth in working capital requirements and capital expenditures to support expansion in Taiwan and San Jose. The company plans to finance these projects through operating cash flows and additional bank financing.
- Liquidity Risk: The company holds approximately $5.4 million in auction rate securities classified as long-term investments. These securities are illiquid due to failed auctions since 2008. While deemed temporarily impaired with an unrealized loss of $0.2 million, the company cannot access these funds without a potential loss of principal if a liquid market does not develop.
- Related Party Risk: The company relies heavily on Ablecom Technology Inc. (a related party) for contract manufacturing. Purchases from Ablecom represented 23.1% of cost of sales for the quarter. Conflicts of interest exist due to family ties between the Liang families (Supermicro and Ablecom leadership).
- Market Risks: Results are subject to fluctuations in the global economy, component shortages (specifically microprocessors from Intel and AMD), and pricing pressures from competitors.
- Legal: A significant litigation matter with Digitechnic, S.A. was settled in December 2009 with a payment of $1.1 million; no new material litigation is currently pending.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory reserves given the 38% increase in inventory levels and the rapid obsolescence cycle of server components.
- Auction Rate Securities: Monitor the liquidity status of the $5.4 million investment in auction rate securities and potential future impairment charges.
- Related Party Transactions: Review the pricing terms and dependency on Ablecom Technology Inc., which accounts for a significant portion of cost of sales.
- Debt Covenants: Confirm continued compliance with financial covenants on the $25 million revolving credit facility and the new term loan.
- Revenue Recognition: Assess the "sell-in" model used for distributors and the adequacy of reserves for sales returns and price protection.