超微電腦 (SMCI) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Super Micro Computer, Inc.

third-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 a 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 Presentation tab.

During the Company's presentation, all participants will be in a listen-only mode.

Afterward, securities analysts and instructional -- excuse me -- institutional portfolio managers will be invited to participate in a question-and-answer session, but the entire call is open to all participants in a listen-only basis.

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

A replay of the call will be accessible until midnight, May 12th, by dialing 1-877-870-5176 and entering the conference ID number 1162246.

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.

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

Mr. Hayes, please go ahead, sir.

Good afternoon, everyone, and thank you for attending Supermicro's conference call on financial results for the third quarter fiscal 2016, which ended March 31, 2016.

By now, you should have received a copy of today's news release that was distributed at the close of regular trading, and it's 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'll 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 other SEC filings.

All of those documents are also 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 published 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 third-quarter.

Our revenue was $532.7 million.

It's 16.6% lower from last quarter, and 13.1% higher year-over-year.

Year-to-date, revenue grew 19% over the same three-quarter period last year.

Non-GAAP net income was $19 million.

It's 50% lower from last quarter and 23.8% lower year-over-year.

Non-GAAP earnings-per-share was $0.36 per diluted share compared to $0.73 last quarter and $0.47 last year.

In a seasonally weaker third quarter, we saw softer market demand than anticipated.

Therefore, results for this quarter were at the low-end of our revenue guidance due to a softness with some key customers and channels.

January and February were particularly soft, while March showed improved momentum.

However, revenue continued to grow at an industry-leading pace by growing 13.1% over last year.

This growth was [built] by our two [stormiest] segments of data center and cloud as well as storage.

We are confident that Supermicro will continue to consistently gain market share and grow multiple times by industry's growth rate.

Strategically, we demand focus on our core markets -- data center, cloud and storage, which we are growing faster than the overall market.

In addition, we continue to grow our completed system business, mostly through our direct sales.

Computer systems incorporate older components into a turnkey solution, to deliver a better customer experience, higher revenue and value, and accounted for 70% of our total revenue in the quarter.

Internet data center and cloud was 26% of total revenue, up [40%] year-over-year.

We are participating in the overall move to the cloud with our key customers in this segment, including several of our top 10 global cloud data centers.

We continue to work closely with these leading cloud industry providers on deployment and scale, as well as premium projects leveraging innovative new technologies, such as REC scale architecture and our advanced management software.

We are fully committed to winning in the cloud segment.

And these (inaudible) designs and architectures to be a critical opportunity moving forward.

Storage was 21% of total revenue and grew more than 23% year-over-year.

Our storage sales to cloud and enterprise customers grew 30%, and our sales to hyper converged systems suppliers, who combine our system into their products, grew 14%.

Our storage products (inaudible) fit for open source software defined storage and fresh MEM solutions.

The application optimized (inaudible) architecture provides the best performance in regions for big data and cloud open stack solutions.

Our storage solution has recently received the innovative data award from IP brand Customer Survey.

This award acknowledges Supermicro's overall innovation consistent for software defined storage.

Slide 5, please.

Our core server business remains strong.

We continue to be the industry leader in all fresh MEM solutions and are investing to rapidly expand our ecosystem.

We now have a more than 50 NVMe ready server storage system SKUs to meet the need of any workload.

Supermicro's NVMe solutions are truly hot-swappable with great option and deliver multiple times price/performance ratio, an advantage over traditional set-top or SaaS diversity solutions.

The twin portfolio as well as other products reached high record in March.

We are introduced flexible SILM networking options supporting 1G, 10G, 25G and up to 200G ports for ethernet, efin ping, and Intel, OME pace connectivity on performance.

At the end of our third quarter, we announced the industry's broadest portfolio of server and storage systems based on our new Intel Xeon E5 2600 [34] product family, codename Broadwell.

We introduced a new product across our entire portfolio of cheaper server, cheaper brain, cheaper storage, cheaper workstation and BPUP audible performance.

Over [200] (inaudible) solutions, we provide customer relationships central through Q3 to see the market and expect these new systems to be rapidly adopt by our customer base.

We continue to expand our product offering and innovation to our rapidly growing storage business.

Our simply topic storage systems and industry first to you hot-swap for EFA system with the [second node] of easy access externally hot-swap driver base already in the patent date, began shipping in volume.

And so continue the strong adoption of our maximum capacity for United Bay and for UCicopay storage systems.

This system can drive up to 9 petabytes per (inaudible) and we expanded that offering with both (inaudible) and storage server options.

To address the strong demand and opportunity for embedded and in demand of these solutions, we had expanded our product line with new Intel Xeon D process, SoC and low power systems, enabling new cold, warm and hot storage, IoT Gateway and Compaq server, providing a complete IoT portfolio from the [H2 Cao].

Our server management software and global service continued to be some of our highest margin product lines, and continue to grow multiple times faster than the rest of business.

The global service business is implementing with Solar ER, amortization beginning to compound and improve economic scale for business.

Our software defined total solutions based on open industry standard and industry-leading patterns continue to grow at accelerated rates quarter-over-quarter.

We announced several new software defined storage and open stack cloud solutions in the quarter, delivering end-to-end solutions with industry leading partners.

Slide 6, please.

Geographically, United States was [61.3%] revenue and was up 19.3% year-over-year.

Europe was 17.5% of total revenue and up 5.7% year-over-year.

In Asia, revenue was [14.7%] of total revenue, and up 5% year-over-year.

We have seen that our strategy of focusing on North America and Europe is paying dividends in terms of overall future growth and the profitability.

We are continuing our global expansion, completing new construction frees of our green (inaudible) impact in Silicon Valley and burgeoning vital position in our recently expanded European production facilities.

Operationally, we have managed significant investment in our SAP transition, grower operations and tax structure optimization.

Our worldwide factory (inaudible) is [about 30%] -- sorry, 60% with extra capacity ready to support our future growth and profitability.

We anticipated these one-time investments will deliver sustained short-term and long-term benefits to our scale divisions and profitability.

In summary, our third-quarter growth still greatly outpaced overall industry growth.

Strategically, we are well-positioned with both our expansive new product portfolio and our focus in higher growth storage and cloud solutions.

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

Thank you, Charles, and good afternoon, everyone.

I'll focus my remarks on earnings, gross margins, operating expenses and similar items on a non-GAAP basis, which reflect adjustments to exclude stock compensation expenses.

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

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

Please turn to slide 8.

Revenue was $532.7 million, up 13.1% from the same quarter a year ago, and down 16.6% sequentially.

The increase in revenue from last year was primarily due to our increase in service solutions, which was up 23.3%, led by our growth in cloud data center of 40.4% and storage of 23.3% year-over-year.

On a geographic basis, we had strong growth in the US, up 19.3%, as well as growth in parts of Europe and Asia.

Our software -- our Services and Software business has also grown by 147%, which continue to show investments we have made in developing our complete solution platforms are ramping.

The sequential decrease in revenues was primarily due to the seasonal weakness and softer demand from large customers.

Our direct customer business was down 22% and our distributor revenue was down 9%.

Complete servers were down 17.9% and subsystems and accessories business was down 13.4%, and our cloud data center business was decreased by 27.1%.

Turning to product mix, a [portion] of revenues from server systems was [69.6% -- 69.9%] of total revenues, which was up from 64.1% in the same quarter a year ago and down from 71% last quarter.

ASP's for servers was $4,400 per unit, which is up from $3,900 last year, and consistent with last quarter.

We shipped approximately 85,000 servers in the quarter and 950,000 subsystems and accessories.

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

One customer did represent more than 10% of our quarterly revenues at 10.2%.

Cloud data center revenues was 26%, and storage was 20.7% of quarterly revenues.

61.3% of our revenues came from the US and 45.6% from our distributors and resellers.

Slide 10.

Non-GAAP gross profit was $79.4 million, up 3.1% from $77 million in the same quarter last year and down 25.5% from $106.6 million sequentially.

On a percentage basis, gross margin was 14.9% for the quarter.

Price changes from AVACOM resulted in no basis point change to the gross profit in the quarter, with total purchases representing approximately 12.4% -- 12.2% of total cost of goods sold compared to 14.7% a year ago and 13.4% sequentially.

Gross margins of [49%] is lower than prior year's gross margin of 16.3%, primarily due to lower utilization, given the additional investments we have made to support our future growth, and product mix, such as DCL servers, which were sold -- which we sold more of this year.

Gross margin sequentially was lower, primarily due to seasonally and -- seasonality and lower utilization on a worldwide basis.

Utilization on a worldwide basis was about 60%, where it had been about 60% sequentially and in the same quarter last year.

Taiwan utilization was 51.4% versus 51.2% sequentially, and 46.4% in the same quarter of last year.

Lower utilization was primarily due to reduced revenue as noted above, and from the recently added capacity to support the future growth of the Company in the US and the Netherlands.

These additions are consistent with our strategy to grow further in other parts of the US as well as increase our presence in Europe.

The utilization is based on using a single shift.

We do have opportunities to use second shifts before making additional investments, and further leverage our existing investments.

Slide 11 and 12.

Operating expenses were $51.1 million, up from $42 million in the same quarter a year ago and down from $53.5 million sequentially.

As a percentage of revenue, operating expenses was 9.6%, which is up from 8.9% in the same quarter a year ago, and up from 8.4% sequentially.

Operating expenses were higher on an absolute dollar basis year-over-year, primarily in personnel expenses to support development of our new solutions such as our MicroBlade and Simply Double storage solutions, as well as Software and Support Services.

Infrastructure investments also were going live on January 1 [NVIDI] in the Netherlands and Taiwan on SAP, and to launch a corporate reorganization on May 1st, to better service our customers overseas, have also been made.

Sequentially, operating expenses were lower due to lower marketing and advertising expenses and a difference in foreign exchange gain or loss of approximately $0.8 million.

The Company increased headcount by 86 sequentially to 2,567 total employees.

Operating profit was $28.3 million, down by 19.1% from $35 million a year ago and down from 46.7% from $53.1 million sequentially.

On a percentage basis, operating margin was 5.3%, down from 7.4% a year ago, and down from 8.3% sequentially.

Net income was $19 million, down 23.8% or $24.9 million a year ago, and down 50% from $38 million sequentially.

On a non-GAAP fully diluted basis, EPS was [$0.36] per share, down from $0.47 per share a year ago, and down from $0.73 per share sequentially.

The number of fully diluted shares used in the third quarter was 53,119,000.

The tax rate in the third quarter on a non-GAAP basis was 32% compared to 28.3% a year ago and 28% sequentially.

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

We expect the effective tax rate on a non-GAAP basis to be approximately 31.6% for the June quarter.

The Company will go live on a global restructuring on May 1st in order to more efficiently support its foreign customer base.

As such, we do expect to see change to our tax rate in the coming years.

Turning to the balance sheet on a sequential basis, slide 13.

Cash and cash equivalents and short and long-term investments were $179.1 million, up $6.5 million from $172.6 million in the prior quarter, and up $67.1 million from $112 million in the same quarter last year.

In the third quarter, free cash flow was a negative $4 million, primarily due to capital expenditures of $9.9 million, offset in part by cash from operating activity of $5.9 million.

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

Slide 14.

Accounts Receivable decreased by $28.5 million sequentially to $285.7 million, due to lower revenues in a seasonally weak quarter.

DSO was 51 days, an increase of seven days from 44 days in the prior quarter.

Inventory decreased by $7.3 million sequentially to $479.3 million.

Days in inventories was 97, an increase of 15 days from 82 days in the prior quarter.

Accounts Payable was $277.3 million, which was 60 days, an increase of 10 days from 50 days in the prior quarter.

Overall, cash converted cycle days was 88, which is 12 days higher than the prior quarter.

The higher rate was primarily driven by lower revenues and cost of goods sold.

Now for a few comments on our outlook.

In the third quarter, we grew 13.1% in a seasonally weak quarter in which we continue to expand our product lines, went live on SAP overseas and prepared for a corporate reorganization.

Year-to-date, our revenue growth is 19.3% for the year.

As we enter the fourth quarter, we see ramping of the Broadwell launch in a traditionally seasonally strong rev quarter for the industry.

However, we are cautious -- also cautious of the current macroeconomic environment.

Therefore, the Company currently expects net sales for the quarter ending June 30, 2016 in the range of $580 million to $640 million.

Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.46 to $0.58 per share for the quarter.

At the midpoint, this would represent a growth of 6% of revenues and negative 9% in EPS from the prior year.

This would also represent a growth of 16% in revenues and negative 11% in EPS for the fiscal year 2016 compared to fiscal year 2015.

We have made many investments during the past year in our infrastructure, such as SAP in our corporate reorganization, through additional facilities abroad and domestically to technology to broaden our Solution Software and Services platforms.

We believe that many of these investments will put us in a great position to capitalize on the opportunities we see ahead of us to further expand our business and grow the profitability globally.

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

Notwithstanding subsequent development, however, the Company may update the outlook or any portion thereof at any time.

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

Thank you, Howard.

We see significant opportunities for Supermicro to continue our industry-leading growth in the next quarter and long-term.

We are actively participating and meeting the IT evolution to the cloud.

We are helping the market accelerate and shift to software defined big data and cloud-based solutions.

We saw with our expensive application patented product portfolio and first market innovation.

We are well-positioned for solid growth in the long-term, and we will continue to outpace overall industry growth rate.

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

(Operator Instructions).

Aaron Rakers, Stifel.

This is [Joe Petroky] on for Aaron.

Maybe a couple questions if I could.

First, kind of going back to some of the utilization that you're talking about, how do we think about your investments and your manufacturing footprint on, that you've outlined over the past several quarters, relative to the demand environment that you're seeing currently?

And then kind of in connection with that, are you still supporting the $3 billion revenue target?

Very good question.

Indeed, we have been very aggressively expanding our global operation, including Asia and Europe.

And that's why we invested a lot on those factory facility, to hire people, train people.

And now our (inaudible) [16%], but we believe that we will continue to grow quickly.

And as to the $3 billion target, I guess it won't be too far away.

Maybe (inaudible) one or two quarters away from our original expectation because of our medical economic.

So just so I'm clear, that's pushed out from fiscal 2017 into the next fiscal year?

For a couple of quarters?

Maybe postpone two quarters to end of the year 2017.

Okay, thank you.

That's helpful.

And then just one more if I could.

Could you maybe talk about the demand that you are seeing for Broadwell?

And then maybe the timing of Knights Landing?

Yes.

I mean, we support -- we have a product line much better performance per dollars and performance for what, we foresee a quicker growth.

And together with our NVMe flurry and available close of product line, we do expect quicker growth with Broadwell and our NVMe solutions.

Thank you.

Thank you.

Mark Kelleher, D.A. Davidson.

Thanks for taking the question.

If we look at -- let me start at the revenue line.

If we look at the strong December you guys posted, was there an element of pulling in orders, do you think, from the March quarter?

And as a follow-on to that, you've listed a lot of areas that were very strong.

Where were some areas that were weak, either in products or regions?

And then could you specifically talk about how your government business is doing?

Thanks.

Hey, Mark.

This is Howard.

Yes, with regards to -- there were no pull-ins, per se, in the quarters between the December and March quarter, there was none of that.

I think the seasonality is really the big story between the two quarters.

Again, December quarter was seasonally strong as it was for the industry, and quite frankly for ourselves as well.

And there is some softness that happened right after that in the March quarter.

The big difference between the two quarters is primarily seasonality, but we did see some softness in some of our customers as well.

Any particular vertical?

Well, I think you saw that, like I said, you want to call it -- it was pretty widespread around a variety of different markets that we talked about here.

Especially big data center pricing, they would be more company.

That is something we saw as well.

Yes.

We talked a little bit about the product mix with regard to selling more data center optimized product, the DC product I referred to on the call.

And that is specifically geared toward the -- I would call hyperscale -- Web 2.0 kind of guide.

All right, And then just one quick second question.

If I look at gross margins and your utilization, try to match those up, what should we expect as -- should we expect that that utilization slowly increases and gross margins kind of hang here around 15%?

Or does that get filled up quickly?

How do we think about gross margins versus utilization?

Yes, Mark.

We just brought onboard, as Charles and I both mentioned, increased expansion primarily here in the US and in Europe to match up with some of the great opportunities that we see there, and also our goal to go out and expand in further parts of the US and in Europe.

So, again, we are hopeful that as we fill the opportunities up there, that we will continue to develop demand -- or capacity.

Okay, thanks.

Alex Kurtz, Sterne Agee.

So I just want to understand the shortfall in the direct business.

It sounds like there wasn't any of the data center business, right?

Because that was up nicely 26% year-over-year.

So -- or maybe it was up in the 20's year-over-year.

So I guess what I'm trying to understand here is, were there a couple of large enterprise direct customers that you wouldn't usually sell through the channel that drove the shortfall here?

Yes, indeed we have continued to grow in enterprise as well, especially software defined storage and cloud as well.

But last quarter, unfortunately, the big order from some big data center is kind of slowing down.

That impacted us a lot for the March quarter.

I know, Charles, but would you classify those orders with those large customers as traditional like Internet data center customer?

Or more like an enterprise customer, like a Fortune 100 or a Fortune 5000 kind of company?

Direct sales.

What was that, Howard?

Direct sales, Alex.

Okay.

Okay.

And then just the other -- taking another turn at this, Broadwell released -- and any pause here around the Broadwell pipeline as you guys sort of build that up in the channel?

I know there's historically been some air pockets around that kind of a release cycle.

Yes, we can see some (inaudible) customer start (inaudible) Broadwell.

And not just Broadwell, but again NVMe solutions.

NVMe solutions have been exactly the strongest player this time, I believe.

I guess so would you say that beyond the seasonality, there was some specific pipeline pause, or have you (technical difficulty) releases?

We have seen some pipeline working for shipping Broadwell and NVMe solutions.

Okay.

All right.

Thanks, guys.

Thank you.

Mehdi Hosseini, SIG.

This is Bill Grinstead in for Mehdi.

I wanted to take another turn on gross margins here.

I know you guys gave a few bullets for why it was more pressured year-over-year, but even comparing against your fiscal first quarter, the September quarter, similar revenue volume, but gross margin was still down 50 to 100 basis points.

And so I was wondering if you guys could lay out for us or weight the impact of lower utilization versus higher revenue mix in the data center, that might be able to help us hone in kind of what gross margins are going to look like going forward.

Thank you.

I guess last quarter another factor to lower gross margin was the market growing downward.

So a key component of that memory and hard drive prices are lower than before.

And other than that, the acceleration rate now we have plenty enough space, so we can continue to grow our revenue without investing more on those facilities.

So that (inaudible) generated some positive side.

Just to add to what Charles said, understand that we just brought some of our investments onboard for our capacity that weren't there in September.

So again, if you are comparing September quarter versus the March quarter with regards to two seasonally weak quarters, there was some different investments that we just brought online for further capacity utilization, in particular this quarter.

Okay, great.

That's helpful.

And then again on the Broadwell launch, I know you guys have historically spoken about the pause that was just referenced, kind of leading up to one of these refreshes.

And then the big revenue quarter, the big pent-up demand that kind of unleashes, and that would be in the June quarter here, the midpoint of guidance is up 14%.

And I understand you guys called out some macro weakness, and you pushed out the $3 billion target a bit.

But are you guys seeing the normal type of activity at your headquarters, testing all the different sockets, the normal type of demand leading into one of these refreshes.

Would you characterize this any differently?

It would be our [gross will be] continue very strong.

Still multiple time order industry average growth rate.

However, again the medical environment looks that it would be solved.

That's why we are ready to be more conservative.

And would the softness be characterized on the data center side or the enterprise side or across the board?

We so see kind of a shooting size data center pricing become more competitive than before.

And again, as you know, we have selected to take a loss there.

Okay.

All right.

Thank you, guys.

Thank you.

Rich Kugele, Needham.

-- in for Rich.

Just sticking with the gross margin, at the low end of your guidance range, what would you expect gross margin to be?

We haven't given specific gross margin guidance on the ranges there.

I think you guys can translate a bit back along the EPS.

Okay, thank you.

Nehal Chokshi, Maxim Group.

Can you talk about the progress you are seeing with the larger in price data center push?

You mentioned your software and services were up 147% year-over-year.

And if I recall correctly, I think you were talking about a doubling or a tripling of that nascent opportunity.

So could you revisit that, where you guys are at relative to your expectations one, two quarters ago?

Yes, we can see our management's all the way up software defined solution and that's for storage over cloud, continue to grow quickly.

Again, 2X to 3X yearly.

And we believe this trend will continue.

Okay, thank you.

Thank you.

And this does conclude the question-and-answer session of our conference call.

And I would like to turn the conference back to Mr. Liang for any closing remarks.

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.

That does conclude the Super Micro third-quarter fiscal year 2016 conference call.

We do appreciate your participation.

You may disconnect at this time.

Thank you.