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Super Micro Computer Serves Up Winning Business Model

By: Investor's Business Daily
Posted: 5/5/2014 4:18:00 PM
Referenced Stocks: SMCI;INTC;HPQ;IBM

You don't spend more than two decades in the rapidly changing world of computer servers without knowing how to adapt to new product cycles and technologies.

Super Micro Computer ( SMCI ) is proof enough of that, using its expertise in product development and innovation to stay a step ahead of much larger rivals. The firm designs, develops, manufactures and sells server systems and solutions.

Its products include servers, workstations, storage systems, server components, networking devices and server management software. Super Micro also provides services and support to clients. Its solutions are based on x86 architecture, the personal computer central processing unit (CPU) architecture and platform developed byIntel ( INTC ).

Super Micro has delivered steady profits and solid revenue growth over the years by using its research and development expertise to produce innovative new products quickly, analysts say.

"When new server components are introduced to the market by its partners, SMCI is typically first to respond with new servers that leverage the new components," noted Mark Kelleher, analyst at D.A. Davidson.

One of the most important components is the CPU, he says. And one of Super Micro's key suppliers in that area is Intel.

Intel Connection

Intel typically introduces a new CPU architecture every year, then introduces an upgrade six months after the initial introduction. Intel's current high-end architecture is its Ivy Bridge-E architecture.

"When Intel introduces a new CPU to the market, SMCI typically sees an upsurge of server sales as it takes advantage of the new product cycle," Kelleher said.

That upsurge has been evident in Super Micro's recent financial returns. Last month, the company posted a 34% year-over-year gain in revenue for its fiscal third quarter, which ended in March. It was the biggest top-line increase in years and marked the sixth straight quarter of double-digit growth.

Super Micro officials, who could not be reached for comment, have long touted the company's product innovation as one of its key growth drivers. On a fiscal Q3 conference call with analysts, CEO Charles Liang said his company's "strong foundation in product innovation and global operations" has been a key to its sales momentum.

"More of our customers understand that computer systems and solutions from Super Micro bring more long value to their business," he said. "The systems have been optimized for performance, power efficiency and reliability."

Super Micro has benefited from the technology transition to Ivy Bridge as well as updated offerings in the company's FatTwin brand of storage solutions.

Meanwhile, Super Micro has boosted its bottom line through recent initiatives to improve efficiencies. These initiatives include shifting its product mix toward higher-margin servers, better pricing for components such as disk drives, and the construction of a new manufacturing facility in Taiwan.

Because of these moves, Super Micro "should continue to see an upward trend in gross margins," Kelleher noted.

During its fiscal third quarter, Super Micro posted a gross margin of 15.4%, up from 14.1% the prior year. The uptick was partly due to a rise in production at the Taiwan plant, which has made serving clients in Asia more cost-effective.

"Taiwan factory utilization reached 50% (in the quarter) on solid Asian deal flow," Needham analyst Glenn Hanus noted in a report.

On the Q3 conference call, Liang said Super Micro hopes to reach 100% utilization at the Taiwan facility within 12 months.

Although Liang says Super Micro is "continuously speeding up" its business growth in Asia, the company still gets most of its business closer to home. North America accounted for 54% of Super Micro's overall sales during the fiscal third quarter. Europe was next at just less than 22%, followed by Asia at 21%. The rest came from other markets.

Super Micro posted total revenue of $373.8 million during the quarter. That was up from $278 million the previous year and well above consensus estimates for $335.2 million.

Earnings rose 61% to 37 cents a share, topping views for 27 cents. It was the company's fifth straight quarter of double-digit EPS growth.

Raised Guidance

Super Micro also raised its fiscal Q4 sales guidance to a range of $370 million to $410 million, above the $389.3 million currently expected by analysts. It guided fourth-quarter earnings to a range of 35 cents to 41 cents a share. Analysts' current consensus view for the quarter is 38 cents a share, according to a poll by Thomson Reuters.

Super Micro does business in a highly competitive and rapidly evolving market that includes much larger rivals such asHewlett-Packard ( HPQ ),IBM ( IBM ) and Dell.

Despite its relative lack of size -- or perhaps because of it -- Super Micro tends to be especially fleet of foot when it comes to bringing products to market.

"Super Micro is typically one of the first vendors to introduce new servers based on Intel's latest CPU architecture," Kelleher noted. "The company combines the new CPUs with its internal R&D to create industry-leading x86-based servers, with which it takes market share from its larger competitors."

Analysts polled by Thomson Reuters expect Super Micro to maintain a brisk growth pace over the next couple of years, with earnings rising 81% in fiscal 2014 and 21% in fiscal 2015. Its shares trade near 20.