Business Context and Reporting Period
Company: Super Micro Computer, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: The Company designs, develops, manufactures, and sells application-optimized, high-performance server solutions based on modular, open-standard x86 architecture. Products include complete rackmount and blade server systems, as well as components (serverboards, chassis, accessories) sold to distributors, OEMs, and end customers.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2009 |
Three Months Ended Mar 31, 2008 |
Nine Months Ended Mar 31, 2009 |
Nine Months Ended Mar 31, 2008 |
|---|---|---|---|---|
| Net Sales | $109,540 | $136,755 | $382,156 | $391,637 |
| Gross Profit | $16,327 | $24,826 | $68,255 | $75,126 |
| Gross Margin % | 14.9% | 18.2% | 17.9% | 19.2% |
| Operating Income | $415 | $8,271 | $19,529 | $29,693 |
| Net Income | $1,231 | $5,024 | $13,749 | $18,571 |
| Diluted EPS | $0.03 | $0.13 | $0.35 | $0.48 |
| Cash & Equivalents | $62,702 (as of Mar 31, 2009) | |||
| Operating Cash Flow (9mo) | $13,448 | |||
| Total Debt (Long-term + Current) | ~$10.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 19.9% ($27.2 million) for the quarter and 2.4% ($9.5 million) for the nine-month period compared to the prior year. Management attributes this primarily to reduced IT spending due to the global economic downturn and customer order delays in anticipation of Intel's Nehalem microprocessor launch.
- Margin Compression: Gross margin declined to 14.9% from 18.2% in the quarter. This was driven by competitive pricing pressures, a shift in product mix, and lower average selling prices for maturing products.
- Profitability Drop: Net income fell 75.5% for the quarter and 26.0% for the nine-month period. Operating income dropped significantly due to the revenue decline and increased R&D spending as a percentage of sales (7.8% vs 5.8% in the quarter).
- Inventory Management: Inventory balances decreased slightly to $82.9 million from $85.7 million. The provision for excess and obsolete inventory dropped significantly to $0.5 million (quarter) and $0.8 million (nine months) compared to $2.2 million and $6.7 million in the prior year periods, reflecting improved inventory management.
- Stock Repurchases: The Company repurchased 445,028 shares of common stock for approximately $2.0 million during the nine months ended March 31, 2009.
Outlook, Risks, and Contingencies
- Guidance & Outlook: Management expects to benefit from the introduction of Intel's Nehalem microprocessors with an anticipated increase in sales for the quarter ending June 30, 2009. However, the Company notes that quarterly results will likely fluctuate due to the economic environment and the timing of new product introductions.
- Liquidity Risk (Auction Rate Securities): The Company holds approximately $14.6 million in long-term auction-rate securities. These securities have failed to auction since February 2008, losing short-term liquidity. While the Company has recorded an unrealized loss of $801,000 (deemed temporary), there is no assurance these can be liquidated without a loss of principal if needed.
- Related Party Transactions: The Company relies heavily on Ablecom Technology Inc. (a related party) for contract manufacturing. Purchases from Ablecom represented 18.1% of cost of sales for the quarter. Conflicts of interest exist due to shared ownership between the Company's CEO and Ablecom's CEO.
- Legal Proceedings: The Company is involved in a lawsuit with Digitechnic, S.A. in France regarding alleged defective products. A bond of $3.04 million was posted, collateralized by a $1.54 million letter of credit. Management believes the claim is without merit and does not expect a material adverse impact.
- Export Compliance: The Company has previously entered into plea and settlement agreements regarding violations of export control laws (shipping to Iran). Management asserts current compliance but notes the risk of future penalties.
Investor Verification Checklist
- Auction Rate Securities Liquidity: Verify the current market status of the $14.6 million in auction-rate securities and the potential for other-than-temporary impairment charges.
- Related Party Pricing: Assess whether pricing terms with Ablecom Technology Inc. are consistent with arm's-length transactions given the significant ownership overlap.
- Inventory Valuation: Monitor the adequacy of inventory reserves given the rapid pace of technology obsolescence and the recent reduction in write-down provisions.
- Customer Concentration: While no single customer exceeded 10% of sales, verify the stability of the distributor channel which accounts for approximately 65% of net sales.
- Legal Exposure: Track the status of the Digitechnic litigation in France and any potential impact on the $3.04 million bond.