How did Super Micro Computer's revenue and profitability change in fiscal 2008?

Net sales grew 28.6% to $540.5 million, driven by higher unit volumes and average selling prices. Net income increased to $25.4 million from $19.3 million, and diluted earnings per share rose to $0.65 from $0.57.

What are the main risks related to the company's investments?

The company held approximately $16.1 million of long-term auction rate securities as of June 30, 2008. Auctions failed beginning in February 2008, so these investments are not currently liquid, and the company may need to record impairment charges or hold them to maturity.

How significant is the company's relationship with Ablecom Technology?

Ablecom is a related party and a major contract manufacturer. Purchases from Ablecom represented 24.3% of cost of sales in fiscal 2008, and Ablecom's chief executive officer is the brother of the company's CEO. The filing notes that these related-party terms may be less favorable than arm's-length arrangements.

Are there any compliance or internal control issues investors should know about?

The company is not in full compliance with Nasdaq independent director and audit committee requirements after the death of an independent director and must add a new outside director to regain compliance. A material weakness related to cash flow statement classification was identified during the year, and management reports it was remediated as of June 30, 2008.

What is the status of the Digitechnic litigation?

A French lawsuit by former customer Digitechnic, S.A. alleging defective products remains pending. The French Supreme Court reversed the appellate decision in February 2007 and ordered a new hearing, and the company posted a $3,040,000 bond collateralized by a $1,540,000 letter of credit. Management believes the claim is without merit.

SMCI/SMCIP 10-K FY2008 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 2, 2008. Cited figures are marked; the original filing is the authoritative source.

Super Micro Computer, Inc. (Nasdaq: SMCI) reports its fiscal 2008 annual results for the year ended June 30, 2008.

The company designs, develops, manufactures and sells application optimized, high performance x86 server systems and components, selling primarily through distributors. Net sales rose to $540.5 million^a from $420.4 million in fiscal 2007, and net income increased to $25.4 million from $19.3 million. Gross profit was $103.6 million, and income from operations was $40.3 million.

Diluted earnings per share were $0.65^b, compared with $0.57 a year earlier. Sales growth was driven mainly by higher unit volumes and average selling prices, with server systems accounting for $209.1 million of net sales, up from $152.5 million. Cost of sales rose to 80.8% of net sales from 82.2%, and research and development expense increased to $30.5 million.

Cash and cash equivalents were $51.5 million^c at year end, and cash provided by operating activities was $18.5 million. Ablecom Technology, a related party, supplied 24.3% of cost of sales, and the company disclosed significant related-party purchases and sales with it.

The filing also flags several risks for investors, including $16.1 million^d of auction rate securities that became illiquid in February 2008, a Nasdaq independent director and audit committee compliance deficiency following a director's death, and a material weakness in cash flow statement classification that management reports as remediated as of June 30, 2008. The Digitechnic litigation in France remains pending.

02—Key points

Key Highlights

Net sales increased to $540.5 million in fiscal 2008 from $420.4 million in fiscal 2007.
Net income rose to $25.4 million, or $0.65 per diluted share, from $19.3 million, or $0.57 per diluted share.
Gross profit increased to $103.6 million, and income from operations rose to $40.3 million from $29.9 million.
Server systems net sales reached $209.1 million, or 38.7% of net sales, up from $152.5 million.
Cash and cash equivalents ended the year at $51.5 million, and operating cash flow was $18.5 million.
Approximately $16.1 million of long-term auction rate securities became illiquid after auctions failed beginning in February 2008, with an unrealized loss of $744,000 recorded.
Ablecom Technology, a related party, accounted for 24.3% of cost of sales, and the company is not in full compliance with Nasdaq independent director and audit committee requirements following a director's death.

03—Questions

Frequently Asked Questions

How did Super Micro Computer's revenue and profitability change in fiscal 2008?
Net sales grew 28.6% to $540.5 million, driven by higher unit volumes and average selling prices. Net income increased to $25.4 million from $19.3 million, and diluted earnings per share rose to $0.65 from $0.57.
What are the main risks related to the company's investments?
The company held approximately $16.1 million of long-term auction rate securities as of June 30, 2008. Auctions failed beginning in February 2008, so these investments are not currently liquid, and the company may need to record impairment charges or hold them to maturity.
How significant is the company's relationship with Ablecom Technology?
Ablecom is a related party and a major contract manufacturer. Purchases from Ablecom represented 24.3% of cost of sales in fiscal 2008, and Ablecom's chief executive officer is the brother of the company's CEO. The filing notes that these related-party terms may be less favorable than arm's-length arrangements.
Are there any compliance or internal control issues investors should know about?
The company is not in full compliance with Nasdaq independent director and audit committee requirements after the death of an independent director and must add a new outside director to regain compliance. A material weakness related to cash flow statement classification was identified during the year, and management reports it was remediated as of June 30, 2008.
What is the status of the Digitechnic litigation?
A French lawsuit by former customer Digitechnic, S.A. alleging defective products remains pending. The French Supreme Court reversed the appellate decision in February 2007 and ordered a new hearing, and the company posted a $3,040,000 bond collateralized by a $1,540,000 letter of credit. Management believes the claim is without merit.

04—Continue

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