超微電腦 (SMCI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Supermicro Computer, Incorporated second-quarter fiscal 2016 conference call.

The Company's news release issued earlier today is available from its website at www.Supermicro.com.

In addition, during today's call the Company will refer to the slide presentation that is made available to participants which can be accessed in a downloadable PDF format on its website at www.Supermicro.com in the Investor Relations section under the Events and Presentations tab.

(Operator Instructions)

As a reminder, this call is being recorded Thursday, January 28, 2016.

Replay of the call will be accessible until midnight Friday, February 11 by dialing 1-877-870-5176 and entering conference ID number 3488698.

International callers should dial 1-858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President, Investor Relations.

I would now like to turn the conference over to Mr. Hayes.

Please go ahead, sir.

Good afternoon and thank you for attending Supermicro's conference call on financial results for the second-quarter fiscal year 2016, which ended December 31, 2015.

By now, you should have received a copy of today's news release that was distributed at the close of regular trading, and is available on the Company's website.

As a reminder, during today's call, the Company will refer to a presentation that is available to participants in the Investor Relations section of the Company's website under the Events and Presentations tab.

Please turn to slide 2. Before we start, I will remind you that our remarks include forward-looking statements.

There are a number of risk factors that could cause Supermicro's future results to differ materially from our expectations.

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2015, and our other SEC filings.

All of those documents are available from the Investor Relations page of Supermicro's website.

We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP financial results and outlooks.

For an explanation of our non-GAAP financial measures, please refer to slide 3 of this presentation, or to our press release, post earlier today.

In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation.

I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you, Perry, and good afternoon, everyone.

Please turn to slide 4. First, let me provide you with the highlights of our fiscal second quarter.

Second-quarter revenue was $639 million, another record high for Supermicro.

It is 23% higher quarter over quarter and 27% higher year over year.

Supermicro is a long-term very high-growth Company.

We have grown five times since Q1 2009.

We are on target for meeting our fiscal 2016 revenue growth rate production of greater than 20%.

Our current quarter is above target, as well as our year-to-date fiscal first-half performance.

Non-GAAP net income was $38 million and was 13.4% higher compared to last year.

Supermicro's non-GAAP earnings per share was $0.73 per diluted share compared to $0.32 last quarter, or $0.65 last year.

In the seasonally strong second quarter, our growth rate was more than four times the industry's average and we continued to strongly increase market share.

Our growth was mainly driven by our computer system solutions, which account for 71% of our total revenue in the quarter.

We also saw growth across our strategic verticals.

[We saw a cloud] and Internet data center representing 30% of total revenue.

Storage Solutions again shows strong growth, up 58% from last year and now accounts for 21% of total revenue.

This high-growth segment had contributed to our strong business growth.

We have been securing new design wins with superior first-to-market technologies and application optimization.

They are keys to our winning strategy for our computer systems and solutions.

A couple of strong examples of growing partnerships in this quarter include a Fortune 50 company that has started to ship new private cloud and storage appliance with our high storage entity and NVMe supported Twin Architectures.

Another tier 1, also a new big customer, and a Big Data Internet company who just scale from development to a [hybrid into premier], using the 4UNO our FatTwin that delivers the inter-treaty base power efficiency, computing density and performance for barriers.

These are truly win-win scenarios.

Our product portfolio provides our customers incredible flexibility.

Our first go-to-market innovation enables them to deliver the most optimized solution and our expanding enterprise capabilities provided them the global support and serviceability they require.

Slide 4 please.

Slide 5 please.

The strong growth of our storage business has been driven by the rapid market adoption of [solo air] defined storage.

We should have placed this story hardware portfolio in the industry.

A large number of storage appliance vendors rely on Supermicro to build a converged storage platform.

Revenue from our storage appliance partners was a significant contributor in our overall storage growth.

On the product and technology side, we are in industry leader in hybrid and All-Flash NVMe storage systems.

Empowering software defined storage solutions that genetically outperforms legacy proprietary storage technology.

We introduced our simply diverse storage architecture with an industry first to you (inaudible) 48 base system with patent [second node of tier up] storage, which delivers up to capacity of Company SuperBlade systems.

We have seen strong demand for our new 3U MicroBlade with its high computing density supporting up to [80] processors per 1U.

That compute is combined with an impressive storage capacity for traditional data center and also a greater choice for All Flash hyper [read] storage applications.

Building on the strong success of our 4U 90 bay storage platform, we are expanding their product line with 90 and 60 bay storage service systems and more.

Net revenue on our (inaudible) and data center optimize this year recommends server products grew more than 50% year-over-year.

Customers like a extremely high memory and storage capacity and I/O expandability.

Where our offerings are lowest TCO, via high power efficient system design.

We still have upcoming launch of a new Intel Xeon processor, code-named [borrow-ware].

We are expecting continued strong growth on the (inaudible) and TCO products as the meta-data center will upgrade to the faster and more efficient technology.

Continuing to deliver on our first-to -market strategy, we are already providing many [borrow-ware-based] products to customers seeking early deployment and testing.

Our story of portfolio and global service, though relatively new, and starting from a small base, continue to be our fastest growing high-margin product lines.

The [StarterWare] and service products are key to the success of our overall solution, sales strategy and critical contributor to our long-term margin growth.

Over the last year, we doubled our SuperServer Manager or SSM StarterWare user base and more than doubled our StarterWare service revenue.

These numbers will not no doubt continue to grow as we continue to promote and expand our SSM features.

On our global service, we are continuing to invest in our service capability, capacity and expanding field application and engineering to support our growth in the enterprise market.

Slide 6 please.

The other category, North America was 63.7% revenue and it was up 41.9% year over year.

Europe was 17.9% of total revenue end up 24.6% year over year.

In Asia, revenues were 13.8% of total revenue, and up 12.5% year over year.

We are seeing that our strategy of focusing on North America and Europe is paying dividends in term of overall revenue growth and basic profitability.

We are continuing the effort of global expansion as we complete new construction phases of our green computing pack in Silicon Valley and doubled our production facilities in Europe.

That dramatically increased our manufacturing scale to service our customer worldwide.

In summary, Supermicro has again set a record high quarter for revenue and earnings.

We are in the strongest position that we have ever been, and we are growing multiple times faster than the overall industry.

Now, we are extremely focused on executing our strength in technology and leveraging our global foundation.

We believe calendar 2016 will be a very strong year for Supermicro.

For more specifics on the December quarter, let me turn it over to Howard.

Thank you, Charles, and good afternoon, everyone.

I will focus my remarks on our earnings gross margins, operating expenses, and similar items on a non-GAAP basis, which reflects adjustments which excludes stock compensation expenses.

Reconciliation of GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release, and in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with a review of the second-quarter income statement.

Please turn to slide 7. Revenue was a record $639 million, up 27% from the same quarter a year ago and up 23% sequentially.

The increase in revenues from last year was primarily due to our increase in server solutions, which was up 50.1% led by our growth in cloud data center or 86.3%, and storage of 58.4% year over year.

On a geographic basis, we had strong growth in the US, up 41.9% as well as growth in parts of Europe and Asia.

Our services and software revenue have grown by over 100%.

The sequential increase in revenues was primarily due to our continued execution of our business model, and seasonal strength.

Our direct customer business was up 45%, while our distributor revenue was up 8%.

Complete servers was up 50.1%, while subsystems and accessories business was down 7.7%.

Our cloud data center business grew 48.3%, as we grow our existing relationships and establish new relationships.

Turning to product mix, the proportion of revenues from server systems was 71% of total revenues, which was up from 60.1% in the same quarter a year ago, and up from 68.6% last quarter.

ASPs for servers was $4,400 per unit, which is up from $3,900 last year and from $4,100 last quarter.

We shipped approximately 102,000 servers in the quarter and 1,092,000 subsystems and accessories.

For the first time, we have gone over 100,000 servers units in shipment in the quarter.

We continue to maintain a diverse revenue base, with over 700 customers.

One customer did represent more than 10% of our quarterly revenues at 15%.

Cloud data center revenues was 29.7%, and storage was 20.7% of quarterly revenues.

63.7% of our revenues came from the US and 41.9% from our distributors and retailers.

Slide 9. Non-GAAP gross profit was $106.6 million, up 25.9% from $84.7 million in the same quarter last year, and up 47.2% from $72.5 million sequentially.

On a percentage basis, gross margin was 16.7% for the quarter.

Price changes from [Ablecom] resulted in no basis point change to the gross profit in the quarter, with total purchases representing approximately 13.4% of total cost of goods sold, compared to 13.7% a year ago and 13.2% sequentially.

Gross margin of 16.7% is comparable to the prior year's gross margin of 16.8%.

Higher sales and complete server solutions and strong vendor relationships were positive to margin.

These were offset in part by higher cloud data center sales which are -- typically have lower margin.

Gross margin sequentially was higher, primarily due to the strong vendor relationships and higher sales of complete server solutions.

Utilization for Taiwan was comparable at 51.2%.

Operating expenses were $53.5 million, up from $38.6 million in the same quarter a year ago, and up from $47.1 million sequentially.

As a percentage of revenue, operating expenses was 8.4%, which is up from 7.7% in the same quarter a year ago and down from 9% sequentially.

Operating expenses were higher on an absolute dollar basis year over year primarily in personnel expenses to support development of our new products, such as our MicroBlades and Simply Double storage solution, as well as our software and support services to support the growth of our total solutions.

Sequentially, operating expenses were higher due to higher personnel expenses to support the development of our products and growth of our business and the difference in foreign exchange gain and loss of $2.4 million.

The Company headcount increased by 120 sequentially, to 2,521 total employees.

Operating profit was $53.1 million, up from -- of 15.3% from $46.1 million a year ago, and up by 109.9% from $25.3 million sequentially.

On a percentage basis, operating margin was 8.3%, down from 9.1% a year ago and up from 4.9% sequentially.

Net income was $38 million, up 13.4% from $33.5 million a year ago, and up 130.4% from $16.5 million sequentially.

Our non-GAAP fully diluted EPS was $0.73 per share, up from $0.65 per share a year ago and up from $0.32 per share sequentially.

The number of fully diluted shares used in the second quarter was 52,113,000.

The tax rate in the second quarter on a non-GAAP basis was 28% compared to 27% a year ago and 34.2% sequentially.

The rate was lower sequentially primarily due to the retroactive reinstatement of the R&D tax credit in December 2015.

The R&D tax credit was made permanent.

We expect the effective tax rate on a non-GAAP basis to be approximately 32.2% for the March quarter.

The Company is working on our tax structure to leverage our overseas expansion, which may reduce our tax rate in the coming year.

Turning to the balance sheet on a sequential basis, slide 12.

Cash and cash equivalents and short- and long-term investments were $172.6 million, up $59 million from $113.6 million in the prior quarter, and up $86.7 million from $85.9 million in the same quarter last year.

In the second quarter, free cash flow was $59 million, primarily due to net income of $34.7 million, and an increase in accounts payable of $58.4 million, offset in part by increases in inventory of $27.2 million and an increase in accounts receivable of $17.8 million.

We are working on extending our loan facilities to support the continued growth of the Company, both domestically and abroad.

Slide 13.

Accounts receivable increased by $17.1 million sequentially to $314.2 million, due to higher revenues in a seasonally strong quarter.

DSOs, days inventory outstanding, was 44 days, a decrease of 11 days from 55 days in the prior quarter.

Inventory increased by $77.2 million sequentially for up to $486.5 million due to preparation of inventory ahead of the Lunar New Year holiday and preparation for our Broadwell solutions.

Days and inventories were 82, a decrease of 13 days from 95 days in the prior quarter.

Accounts payable was $321.2 million, which was 50 days, a decrease of 8 days from 58 days in the prior quarter.

Overall, cash conversion cycle days was 76 days, which is 15 days lower than our prior quarter.

Now for a few comments on our outlook.

In the second quarter, we grew about 27% in the seasonally strong quarter, in which we continue to expand our product line and execute our business model.

Year to date, we have exceeded our revenue goal objective of over 20% growth for the year.

As we enter the third quarter, we continue our development for the Broadwell launch, but do not expect material contributions this quarter.

In addition, due to seasonal softness of the March quarter for the industry, we are also cautious of the current macroeconomic environment.

Therefore, the Company currently expects net sales for the quarter ending March 31, 2016 in a range of $530 million to $580 million.

Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.43 to $0.53 for the quarter.

At the midpoint, this would represent a growth of 18% of revenue and 1% in EPS for the prior year.

It is currently expected that the outlook will not be updated until the release of the Company's next quarterly earnings announcement, notwithstanding subsequent developments.

However, the Company may update the outlook or a portion thereof at any time.

With that, let me turn it back to Charles for some closing remarks.

Thank you, Howard.

2016 is shaping up to be a year of robust growth for Supermicro.

We see huge opportunities for the market shift for software-defined Big Data and cloud-based solutions.

Where Supermicro had great track record of leveraging our solid engineering and foundation to produce innovative products and services for those markets, we are on target for meeting our fiscal 2016 revenue growth rate protection of greater than 20%.

And with that, I am confident that we will continue to outperform the market and grow multiple times faster than the rest of our industry, both short-term and long-term.

Operator, at this time, we are ready for questions.

(Operator Instructions) Aaron Rakers, Stifel Nicolas.

This is [Joe Petrarchi] on for Aaron.

Just a couple of questions, if I could.

Maybe first start with what type of growth did you see in China?

I noticed that you said the timing is facility utilization was I think basically flat on a sequential basis, so maybe the growth in China and then how do we think about the Taiwanese facility utilization going forward?

Yes.

Indeed, we had very aggressive improvement in our sales and support for us in Europe.

And now with global operations, we were supporting Europe [partially] from Asia.

So, Asia facility evaluation we improved.

At the same time, we also started to support some strategic customers in Asia, including China.

So, our utilization rate for our Taiwan facility should start to grow greater.

Okay, and then maybe as a follow-up, can we talk a little bit about the OpEx?

I think on sales and marketing as well as G&A, we are up quite a bit sequentially.

So, maybe you could talk about the drivers there and how we think about that going forward.

Joe, one of the larger changes between the G&A line would be the foreign ex that you saw that I mentioned on the call.

It's about $2.4 million of delta between the quarter.

In September we had -- I'm sorry, in December -- September, we had a $1.8 million foreign ex gain and in the December quarter we had a loss of about $600,000.

So that -- you can see about a $2.4 million delta with regard to the expenses in that period.

Okay, thanks.

Mark Kelleher, DA Davidson.

Great, thanks for taking the questions.

Congratulations on a strong quarter.

Can you just lay out what you are expecting from the Broadwell transition?

Are we expecting an upgrade cycle?

And it sounded like you are expecting it to kind of come into play in the June quarter.

What are you looking for there?

Okay, we have a very strong Broadwell product line and it's pretty much all available now.

We are releasing the simple [small OEM] to lots of customers.

However, Intel official launch will not be available until [the very date] of this quarter, that is why we did not expect a lot of revenue contribution to this quarter.

But, that will happen in the June quarter for sure.

Okay, thanks.

Matt Dane, Titan Capital Management.

I was curious, are you gaining traction with wins with some of the larger cloud customers that you previously were not able to penetrate?

I heard you call out a couple of bigger wins and it sounds like you're gaining traction there.

Was I hearing correctly?

Yes, in theory for cloud-based and Big Data-driven Company, we recently won a [favor] of them and the high volume to premium is happening, I believe some now, and much more will happen again June quarter.

Just to reiterate, we did grow about 86% year over year, so we are -- are gaining, as I mentioned, I think more customers and growing with our existing customers as well.

Great, great.

And the customer that you did finally penetrate, what led to them finally choosing to work with you?

What was the final item that pushed them over and won them into your camp?

Indeed, some of them have been huge in our [payable] before and now they find that hey, our compare system is even much better.

And some are brand-new.

So, we won from both segments.

And, not is there some of the other larger cloud players that had previously used you, that are on the cusp from your perspective?

And maybe getting close to finally moving forward and using you in a meaningful way?

I think we have opportunities in a number of different customers, I think, in the cloud, and like I said, our applications and our solutions play very well.

So I think there are great opportunities for us in a variety of different verticals that we are servicing.

Great, thank you.

Rich Kugele, Needham.

This is actually Kim Donovan for Rich Kugele.

Thanks for taking my questions.

What phase of build out are you in for the San Jose facility?

We are in phase 2, Kim.

We completed phase 1 of a 5 phase program, and now we are in phase 2. We just --

Phase 1 just starting volume production about three months ago, and that is another reason why we are able to enable another couple of big customers.

And phase 2, we just kicked off two months ago and will be ready by the end of this year.

Okay, great.

Can you speak to your confidence in hitting $3 billion in revenue in 2017?

Should be pretty positive.

Great, thank you.

Nehal Chokshi, Maxim Group.

Very impressive on the free cash flow generation.

Looks like it was driven by attacking the cash conversion cycle that you talked about, despite the 500 basis point Q over Q increase in the data center customer exposure.

So, can you talk a little bit about more what you did to accomplish this and are the changes sustainable, i.e., is this a new cash conversion cycle that we should be modeling going forward?

This is Howard.

Cash conversion cycle again, it is somewhat seasonally driven at times, too, but we are obviously continuing to focus on our cash conversion cycle.

But we are, as we continue to remind folks, a very high-growth company.

So again, it will vary from time to time.

Okay.

If you look at it over a course of the year, though, on a year-over-year basis, I think that conversion cycle has been increasing.

But I think this is the first time in a while that it's actually not increasing.

I think it has actually come down a bit here.

So, do you feel like on a year-over-year basis it can be stable?

Certainly, on an annual basis, I think we are -- you'll see a little bit more stability in that.

Part of that has to do with also, though, the growth in our business.

We are seeing great opportunities out there to optionally invest, as Charles mentioned here, with regards to our facility.

So, but I think we have a great opportunity there and keep cash.

Okay, great, thank you.

(Operator Instructions) Alex Kurtz, Sterne Agee.

Howard, just wanted to dial in on the OpEx here for the March quarter, trying to understand this FX impact.

We should be modeling down sequentially on OpEx into March, obviously on the seasonal weakness in the revenue, but is there some other factor that would also compound the decline in OpEx from December to March?

Actually, there's two factors we talk about.

The FX, we took a loss of about $600,000 in the December quarter.

It depends upon what the FX rate will be at the end of the quarter.

Right now it looks positive, but it depends on that.

The other thing I will remind you guys is, again, employment tax and those things get reset as of December 31.

So they come back into play in the March quarter, so that will add a bit to the OpEx.

Okay, so should we be thinking about OpEx somewhere between what you did in September and what you did in December?

Just looking at the midpoint of revenue.

I think we have not given guidance there.

But at the end of the day, like I said, I think about the -- I would take out the -- look at the foreign ex and you can model that whichever way you can (multiple speakers) .

Right, okay.

And then on the gross margin, I mean obviously very strong in December here because of the higher revenue.

I would expect obviously margin to come down on the lower revenue from March.

Or is there something else going on with mix where you could be [above] 16%?

For the March quarter are you talking about?

Yes, I am just saying given the strength you had in December, should we -- is there a chance that you could be flat on margin sequentially?

Or how are you thinking about that at least?

I think as we look at the drivers for our margin, there's a couple things I mentioned on the call.

One is the scale of our business, growing the scale of our business.

Per se, that was positive obviously to us in the purchasing power that we gain from that.

Utilization, as we've always talked, is one of those, too, that as we utilize our facilities a bit more, we get benefits from that.

Certainly, there is opportunities, but also, March is very -- usually a very seasonally weak quarter for the industry, because I have modeled that.

So, if you check back in our history, you will see some [fluctuations] in our margins between quarters.

I think if you look back in December last year comparatively to March, I think you'll see about a 50 basis point swing between the two quarters.

Okay, all right, that is helpful.

Thanks, guys.

It appears at this time we have no further questions.

I would like to turn the call back over to Mr. Liang for any additional or closing comments.

Thank you for joining us today and we look forward to talking to you again at the end of this quarter.

Thank you, everyone, have a great day.

Thank you.

Ladies and gentlemen, this does conclude the Supermicro second-quarter fiscal year 2015 conference call.

We do appreciate your participation.

You may disconnect at this time.

Thank you.