超微電腦 (SMCI) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated fourth-quarter and 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 it has 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, August 4, 2016. A replay of the call will be accessible until midnight Thursday, August 18, 2016, by dialing 1-877-870-5176 and entering replay PIN 1154709. 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.

Now I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Thank you. Good afternoon, and thank you for attending Super Micro's conference call on financial results for the fourth-quarter and fiscal-year 2016 which ended June 30, 2016. By now, you should have received is 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 Super Micro'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 Super Micro'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.

Now I will turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you, Perry, and good afternoon, everyone. Please refer to slide 4 through 6, and let me provide you with a summary of our fiscal fourth quarter. Revenue was $524 million. It is 1.6% lower from last quarter, and 8.6% lower year-over-year. Non-GAAP net income was $10.4 million. It's 45.4% lower from last quarter, and 65.4% lower year-on-year. Non-GAAP earnings per share was $0.20 per diluted share compared to $0.36 last quarter and $0.57 last year.

As previously announced, this quarter our results was below expectation. While we continued to grow in middle size accounts, our business has become more dependent on large data center customers. And we had two specific large data center customer projects that impact the quarter. Reduced business from our large data center customers has result revenue [more authority] which, in turn lower our manufacturing and [utilization] globally by 14%, which had a negative impact to margin and profitability.

We are undergoing a restructure of our operational infrastructure, including our global SAP implementation, new global tax restructure, and bonded warehouse. These investments will streamline the business, improve efficiency, and increase profitability in long-term. But unfortunately, the rollout caused some business distraction and slowed down in the quarter. That impact execution and our pricing flexibility. We expect to complete the whole restructuring in the December quarter this year. And after that, we will be more efficient than ever before.

Our last-quarter system sales were 65.5% of revenue compared to 61.7% last year, as we continued to see success in our efforts to grow the higher value total system business. The two key verticals that drive our system business are, first, Internet call data center comprise 18% of total revenue but had been a temporary slowing down the past two quarters. And storage, which was 19% of total revenue, down 15% from last year. However, storage sales to hyper-converged in the software-defined market was up both sequentially and year-over-year. And with our strong NVMe leadership, we expect continued strong growth this year.

From a geographical perspective, we saw mixed results. The USA market was 62.2% of revenue, and was flat with last quarter, and lower by 8.6% from last year. Europe saw weaker results. It was 17.5% of revenue, slightly lower sequentially, and down by about 16% year-over-year. Asia was the bright spot last quarter, with 15.8% of revenue, up 5% quarter over quarter.

While we did not achieve the results we want in Q4, we continue to be focused and constant in the long-term growth of our business. We continued to see the move to cloud, the quick growth of IoT, and rapid innovation as the drivers of our long-term growth. Our core strategy remains unchanged.

First, be first-to-market with new innovation and deliver the broadest choice of server and storage systems in the industry. Second, emphasize strategic relationships in our key verticals and utilize our server building blocks to create the best value on our application optimized solutions. Third, continued growth of our software and service portfolio to provide reliable serviceability and quality for our customers.

With the completion of our new global operation foundation, we will target the following specific actions to achieve a stronger growth and financial performance. We are confident that these actions will be successful, and will enable us to return to strong growth.

First, we will leverage our increased manufacturing capacity and improve operational efficiency to be more flexible and competitive in winning business in our current large customers and to ensure new major customer wins. Second, we will expand our current focus on fast-growing Internet of Things, IoT market, which cover edge server, network enterprise, surveillance, and other embedded solutions.

Slide 6, please. Let me now comment on our product portfolio, which is at the heart of our strategy. Over the last few quarters, we continued to expand the product portfolio, and we introduced a number of strong new products and innovations.

First, we continue to be the industry leader in NVMe, all-flash NVMe, and [hyper real] storage solution. We now have more than [60] NVMe server storage systems that deliver orders of magnitude better performance, multiple times the price-performance ratio and efficiency than traditional storage solutions. Including Simply Double architecture and 60- and 90-bay high-capacity optimized storage platform. We expanded the serviceability and capability of our NVMe system with hot-swappable loading option and [fewer long, fewer pole] systems.

Second, we are ready to deliver at the best architectural levels in software-defined solution with the introduction of our SuperRack scale design we call SRSD. Now, SRSD architecture leveraging our industry-leading product lines to delivery the ultimate in resource optimization in rack platform, rack form factor. This dynamic management technology will enable our data center and cloud customer, especially private cloud customers, to accelerate deployment time and to simplify their management resource overhead. We are an integral part of deep learning, machine learning, and artificial intelligence solutions which drive adoption of today's Big Data infrastructure.

In this quarter, we had introduced systems supporting the new Intel Xeon Phi X200 processor in the -- in both 2U/four-node and tower form factor. When combined with Omni-Path or EDR fabric that deliver incredible performance, that made that research effort possible for more students, professors, and the industry.

Moreover, we introduced 1U non-blocking Nvidia Pascal GPU solution, which is capable of supporting up to four P100 GPU -- Pascal GPU, I mean -- in a slim form factor. We recently delivered a solution to Rutgers University leveraging the Omni-Path networking that was recognized as one of the best Top 500 HPC cluster. This solution are also optimized for transcoding and stemming compression.

Our IoT business provides one of the brightest spots this quarter. The worldwide IoT market is growing about -- at about 11%, according to IPC. And our IoT business grew even faster, at about 30% last year, and now account for about 10% of our total revenue at about $200 million. We invest our R&D resource initially in the industrial PC, called IPC, and IoT gateway projects. And now we have hundreds of optimized IoT and embedded solutions in just three short years, providing a complete product portfolio from the edge to the cloud.

Just recently, we increased R&D investment, expanding our product line, providing new really low-power and really small form factor IoT solutions, which successfully engage with the customer in medical image, security, surveillance, manufacturing, and retail automation. In short, we expect to see hopefully more than 30% growth in IoT and embedded markets this coming fiscal year.

In summary, we have never seen stronger in terms of our product portfolio. And our global operation and automation have been significantly improving. We know the urgency to improve. And we are leveraging all of our strength and capacity to create a competitive vertical position for our customers.

We are investigating more efforts -- we are investing more effort in our strategic relationships through a stronger presence in key markets and continue to be better for new customer in target verticals. We are confident these actions will result in a greater improvement of our financial performance when we go into the new fiscal year.

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

Thank you, Charles. Good afternoon everyone. I will focus my remarks on earnings, gross margins, operating expenses, and similar items on a non-GAAP basis, which reflects 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 in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with a review of the fourth-quarter income statement.

Please turn to slide 9. Revenue was $524.3 million, down 8.6% from the same quarter a year ago, and down 1.6% sequentially. The decrease in revenue from last year was primarily due to our decrease in subsystems and accessories, which was down 17.6%. We had a decrease in sales to distributors which was down 14.8%. These were offset in part by growth in HPC, cloud/Internet data center, and next-gen storage of 93%, 6% and 9%, respectively.

On a geographical basis, we had a decrease in Europe of 15.9% followed by US at 8.6%, while Asia was about flat. The sequential decrease in revenue was primarily due to weakness in server solutions, which was down 7.8% due to less sales from our cloud/Internet data center segment, which was down 31%, offset in part by strength in our subsystems business, which was up 12.9%. In addition, next-gen storage grew at 10.8%. On a geographical basis, we had a decrease in the other regions of 31%, primarily due to our cloud/Internet data center projects. Europe was down 1.8%; US was flat; while Asia was up 5.2%.

Slide 10, turning to product mix, the portion of revenues from server systems was 65.5% of the total revenues, which was up from 61.7% the same quarter a year ago, and down from 69.9% last quarter. ASP for servers was $4,100 per unit, which is the same as last year, and down from $4,400 last quarter. We shipped approximately 84,000 servers in the quarter, and 1,165,000 subsystems and accessories.

We continue to maintain a diverse revenue base, with over 800 customers. No customers represent more than 10% of our quarterly revenues. Cloud/Internet data center revenue was 18.1%, which was a decrease from 26% in the prior quarter, and an increase from 15.5% in the prior year. 62.2% of our revenues came from the US, and 46.8% from our distributors and resellers.

Slide 11. Non-GAAP gross profit was $74.1 million, down 17.7% from $90 million in the same quarter last year, and down 6.7% from $79.4 million sequentially. On a percentage basis, gross margin was 14.1%, down from 15.7% a year ago, and down from 14.9% sequentially. Price changes from CableCom resulted in no basis point change to gross profit in the quarter, with total purchases representing approximately 12.4% of total cost of goods sold, compared to 11.9% a year ago, and 12.2% sequentially.

The year-over-year decrease in gross margin results from lower utilization of our global capacity, which is about 50% compared to about 70% a year ago. This resulted in approximately a 0.5% effect on gross margin. The other 0.3% is attributable to higher inventory reserves on product transitions.

Sequentially, gross margin was down due to about 0.3% from lower utilization of our global capacity, which was about 50% to about 60% last quarter. In addition, 0.3% and 0.2% are attributable to higher warranty and inventory reserves on product transitioned, respectively.

Slide 12 and 13. Operating expenses were $57.9 million, up from $45.3 million in the same quarter a year ago, and up from $51.1 million sequentially. As a percentage of revenues, operating expenses was 11%, which is up from 7.9% in the same quarter a year ago, and up from 9.6% sequentially.

Operating expenses were higher on an absolute dollar basis year-over-year, primarily in R&D, as we invested in personnel expenses and materials to support the development of our total solutions. Sequentially, operating expenses were higher due to higher material and testing fees of about $2.9 million, and higher marketing and tradeshow costs of $2.7 million to support the development and sale of new products.

The Company's headcount increased by 88 sequentially to 2,699 total employees, primarily in R&D. Our forecast for the next quarter: we do expect operating expenses to decrease as we expect to leverage the investments we've already made, offset in part by our annual salary increases.

Operating profit was $16.2 million, down by 63.8% from $44.8 million a year ago, and down from 42.8% from $28.3 million sequentially. On a percentage basis, operating margin was 3.1%, down from 7.8% year ago, and down from 5.3% sequentially. We will increase our efforts to add additional value to our solutions for our customers, while at the same time leveraging investments we have made during the past year.

Net income was $10.4 million, down 65.4% from $30 million a year ago, and down 45.4% from $19 million sequentially. Our non-GAAP fully diluted EPS was $0.20 per share, down from $0.57 per share a year ago, and down from $0.36 per share sequentially. The number of fully diluted shares used in the fourth quarter was 52,955,000.

The tax rate in the fourth quarter on a non-GAAP basis was 34.4% compared to 32.6% a year ago, and 32% sequentially. The effective tax rate for the fourth quarter of the fiscal year 2016 was higher due to higher tax expenses associated with the implementation of the Company's new global corporate structure on May 1, 2016.

The impact was about $0.06 per diluted share. We expect the impact to be about $0.04 per diluted share in the first quarter of fiscal 2017, and to decline as we continue to grow our business offshore and shift our existing offshore customers who are serviced from the US to locations overseas. We expect our effective tax rate to be 40% in the first quarter of fiscal 2017, and to decrease as we go through the fiscal year.

Turning to the balance sheet, consequential basis, slide 14. Cash and cash equivalents and short- and long-term investments were $183.7 million, up $4.6 million from $179.1 million in the prior quarter, and up $85.6 million from $98.1 million in the same quarter last year. In the fourth quarter, free cash flow was $5.7 million, primarily due to the decrease in inventory of $27 million and net income of $7 million, offset in part by a decrease in accounts payable of $31.1 million.

Slide 15. Accounts receivable increased by $3.2 million to $288.9 million due to lower revenue sequentially. Days sales outstanding was 50 days, a decrease of 1 day from 51 days in the prior quarter. Inventory decreased by $30.3 million to $449 million, from the lower forecasted revenues. Days in inventory were 94, a decrease of 3 days from 97 in the prior quarter.

Accounts payable were $249.2 million, which was 53 days, a decrease of 7 days from 60 days in the prior quarter. Overall cash conversion cycle days was 91 days, which is 3 days higher than the prior quarter.

Now for a few comments on outlook. As we enter fiscal year 2017, we look to leverage the investments we have made in our operations -- such as our SAP implementation, global reorganization, and new facilities -- while containing our expenses to drive growth and profitability in a seasonally weak quarter for the industry. Therefore, the Company currently expects our net sales for the quarter ending September 30, 2016, in a range of $470 million to $550 million.

Assuming this revenue range, the Company currently expects non-GAAP earnings per diluted share of approximately $0.15 to $0.30 for the quarter. At the midpoint of this, it would represent a decrease of 2% of revenue and a 30% decrease in EPS for the prior year.

Looking forward, beyond this quarter, we have updated our targets for the coming two years to be 15% to 17% in gross margin, and 6% to 8% on operating margin. These targets reflect our strategy to take advantage of the opportunities we have to take market share and keep disciplined control of our operating costs.

On July 18, 2016, the Company also announced the Company's Board of Directors had adopted a program to repurchase, from time to time, at management's discretion, up to $100 million of the Company's common stock in the open market or in private transactions during the next 12 months, at prevailing market rates. Today, we have purchased 513,194 shares totaling about $10.3 million at an average price of $19.97.

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 will 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. For the entire fiscal year, we saw 11% [revenue growth] for the year, which means Super Micro is still one of the fastest-growing companies in the IT industry. We are much better positioned with our new global SAP implementation, new global operation and corporate tax restructure, and bonded warehouse.

Despite the overall softness of our revenue and the temporary setback of our operations this quarter, our long-term growth trend remains intact based on our even stronger product portfolio. And we are looking forward to a strong new fiscal year.

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

(Operator Instructions). Mehdi Hosseini, SIG.

My first question is for Charles. I am looking at your slide number 7, and I don't see the new server CPU architecture, like a Skylake. And is that having an impact on your ability to forecast, and how these changes in both CPU and graphics are impacting your server business? And I have a follow-up.

We have lots of new designs just available, like Intel Xeon Phi. We will start to ship high volume now. And also like Nvidia Pascal, we have a product fully ready to ship about this month -- I mean August.

And as to Skylake, yes, we have a very strong product portfolio with lots of new architecture and which are -- it's a product for next year. We have been developed this product line for almost 9 months, but really production, it will be next year, maybe along summer time frame.

Okay. And then a follow-up question for Howard. Can you please provide some color on a unit and ASP for both server and subsystem segments?

Sure. On the units side of it, for servers, Mehdi, it was 84,000 units for server units shipped during the quarter. The ASPs were about $4,100. On the units for the subsystem accessories, that was about 1,164,000. And quite frankly, I did not divide out the numbers there with regards to that. It's a mix of a number of different things. So it's really hard to gauge with the ASPs there, so we've never given that out.

Did you say 1,160,000?

1,164,000 units.

Okay, thank you.

Aaron Rakers, Stifel.

Thanks for taking the questions; two, as well, real quick. First of all, as you guys go through, it sounds like a realignment and focus on operational efficiencies. Can you just remind us again where you stand in terms of your manufacturing footprint, and whether or not these efforts have included any reduction of that manufacturing footprint at this point?

Basically it's a big transition. And not just SAP implementation global wide, but also a big impact from our restructure for production, operation, and also global tax, a new system. And we also create a bonded warehouse, new bonded warehouse that kind of limited a lot of our production [decision].

And I would also say the most impacted people had to pay attention to the new system, prepare the product here and there, and that's why the slowdown often is a little bit. But as for our position -- yes, basically we already finished; I'd rather say at least 90% job already finished. And in the next few months, we will finish everything, and hopefully the system becomes perfect in early Q4 this year. And after that, our operation should be much more efficient thereafter.

Okay, maybe to ask it a little bit differently, your updated two-year target model, 15% to 17% gross margin -- can you help us frame of what it would take to get to the midpoint of that gross margin range from a utilization perspective, from your manufacturing?

I think as you look at my utilization numbers this past quarter, we had gotten to about 70% last year, about the same in the fourth quarter, and that's moving down to about 50% this past quarter. You saw about 30 basis points of movement there. So as you go forward, Aaron, as we increase our efficiencies and what have you, you can see that type of impact to our margins with regards to as we increase our utilization and improve our utilization. So I would frame it in that way, going forward: anywhere from 30 to 50 basis points, I think you see in my spreads in my commentary on utilization.

Okay, and I will put one final thing in, just housekeeping -- no 10% customers in this quarter. Did I hear that correctly?

That is correct.

Okay, thank you.

Mark Kelleher, D.A. Davidson.

I wanted to focus on the storage side. I'm not sure I heard everything you were saying about that. Down 15% year-over-year, I think you said; and hyper-converged was strong, I think I heard. Could you just review what you are seeing in storage and what your expectations are going forward?

Yes, the top of global storage revenue, I believe I mentioned about two customers. So we compete with aggressive price from competition. And because my SAP implementation, I would rather say we are a little bit too slow to -- our limited response to the price competition. So with those some big picture there. And this will be recovered pretty soon, I believe.

However, for hyper-converged and software-defined storage, we would be [globally aware] basically. I believe we will continue to grow very strong in hyper-convergence and software-defined storage. Even for regular storage, I believe we will recover to our peak growth very soon.

So that was more of a market share loss there, rather than a weakness in the --?

Yes. In last quarter, we kind of are a little bit too slow in an enterprise response.

Okay, great, thanks.

Rich Kugele, Needham and Company.

In terms of the Internet data center side, do you believe that now with a different margin profile, you would be able to regain business on that side? How does it work from an ordering cadence? Do they typically order transactionally active every quarter, or is it more lumpy than that?

This is Howard. With regards to that, we've always said that the cloud/Internet data center has been more project-based as we are bringing up data centers from quarter to quarter, or what have you. So it is project-based, per se. Some of that accounts for some of the range that we put on this quarter. We do have some projects that are either going to be this quarter or next quarter, and we're still waiting to see when those are going to occur. But it is project-based.

And the business that you lost in the quarter, they don't have any issues with your technology or your value proposition, right? Is this entirely just basically price or being responsive?

Yes. I would rather say in terms of technology, in terms of product portfolio, we feel much stronger than before. But yes, in terms of price competition, especially dynamic [price pool], dynamic -- the local support, we were a little bit screwed up in last quarter.

Okay, and -- well, I will take it off-line. Thanks. Take care.

Brian Alger, ROTH Capital Partners.

I kind of want to follow up on the same train of thought. Just trying to get an understanding of what really went on in the prior quarter. It sounds as though pricing was the primary issue here. And you weren't responsive to the changes in the marketplace. I'm trying to understand what shifted from the competitive landscape, and what lesson has been learned that it won't happen in the future.

I believe the relationship had to be further improved. Kind of when customers are asking for lower price, our people did not respond quick enough; and because it's the first time we faced such a big impact. So we learned a lot. Indeed, the whole Company learned a lot. We turned on a new system that -- the good thing is our new SAP system now will help us. Much easier to capture our real costs, so we can respond to customers quicker as well. (multiple speakers) With our capacity now, much bigger, right? So we are more willing to support certain [projects] much more aggressively.

Okay, so I guess I am looking at a bit of history here, in that the hyperscale customers that have driven a lot of the growth for your Company over the past couple of years -- they have a track record of being very aggressive on pricing. And what I guess I'm hearing -- and it want to make sure I'm hearing it correctly -- is that in the future, you are going to be better positioned to react to that price aggression, which may allow us to retain the revenues. But would that not negatively impact the gross margin profile of the future revenues?

Brian, this is Howard. With regards to that, again, given that we have some excess capacity or additional capacity right now, it allows us to balance out some of this. We may give up a bit on pricing, but it will fill up the plant and reduce the overhead burden that we have by filling it up.

Okay. And Howard, do you get the sense that anything has shifted from the competitive landscape in that your competitors' ability to customize or to deliver feature-rich products has shifted, such that your -- the advantages -- the strategic advantages of the business and its flexibility have altered at all?

with regard to our products, I think Charles has said already, we still believe we provide the best solutions, the best values out there, bar none, from any of our competitors out there.

Especially like NVMe, kind of like the (inaudible) NVMe, kind of like the big twin, our new [accelerator] is coming very soon. And I just mentioned that our SuperRack Scale design will come in very soon and be the -- with so -- customer engage very well with our new design.

Okay, great. I appreciate the candor, guys. Thank you.

(Operator Instructions). Alex Kurtz, Pacific Crest Securities.

I just want to follow up on Brian's question, because I think it's really important that -- well, first of all, was the competitive loss in the quarter really localized to one or two customers? I jumped on the call late, so I'm sorry if I missed that. Or was it misses across a host of customers in the Web scale market?

Yes, it was just a couple of customers, Alex.

Okay. And Howard, I think as Brian alluded to -- and I think it's a really great question -- historically you guys have always positioned yourself as the application optimized technology that would maybe be next to an ODM kind of server, and you guys added more value. I guess what I'm trying to understand here is, was this some very specific situations with those two accounts in the quarter? Or is there a bigger trend happening with that business and with that vertical?

I guess for that couple of customers, it's purely because of our -- I would like to say, a little bit too relaxed. Sorry to say that, but we should respond more aggressively and more dynamically in terms of what customers really need.

But to answer your question, as application optimizers, yes, we are -- indeed we become much stronger than before even, that our NVMe now the strongest [programmer] in the world, that are coming soon between the Pascal design, Knights Landing design -- they are coming soon now(technical difficulty) IT design, or kind of whereas your customer (inaudible) [Michael].

And also, I mentioned about IoT product line, which we grew about 30% last year. This is actually a better margin, a better profit in the margin product line. And we started to invest aggressively about three years ago. And last year, first year we see such a strong growth. And we believe in the next coming many years, we will continue to invest more in IoT embedded.

Okay, we'll talk a little bit more off-line. Thank you very much.

Nehal Chokshi, Maxim Group.

I do have a few questions, and I will move to the question of the day. But before I do that, I think you did provide some color around what you expect for OpEx for next quarter. Can you just review that again?

I mentioned that we do expect to see a decrease in our op expenses for next quarter.

Okay. And so should we be thinking that gross margin will be effectively flat, Q over Q? Or are you guys still trying to say, given -- you have a very large range for revenue and EPS. But if we take the midpoint, are you guys trying to imply that we should expect gross margin to move up slightly, Q over Q? Or should that be flat to actually down?

Nehal, I think we haven't given gross margin guidance out there. Certainly, we are doing our best to maintain gross margins. But as Charles mentioned, we are going to be looking at our pricing and our flexibility there, as well, to grow our market share, as we always have.

I guess start from December quarter, right? Start from October, for example, as our SAP global reorg become much more stable, become more ready. Our iteration rate will grow and our volume, for sure, will grow. And that will improve our profit margin and overall profitability.

Right. And then you have a wider-than-usual revenue guidance. I assume that's a result of the reduced visibility. Can you talk about what parts of the business are you seeing that reduced visibility with?

Still, I mean, in our big data center customer, we try to be more cautious this time, because from that quarter, we experienced the first time bigger impact. We tried to be more conservative.

Okay, now with respect to the question about being more nimble with your pricing, are you explicitly just simply talking about lowering your pricing, get your utilization up; and, therefore, that will offset some of your -- that will allow you to basically have that volume without actually impacting overall gross margin, because you will be driving your utilization up?

Or are you actually talking about more nimbly configuring the products to what the customer needs, to what the competition has out there, to be more optimal in terms of your COGS configuration; and, therefore, still win the deal?

I guess it's a combination, plus now we have a much stronger manufacturer capacity offshore. So once we are able to leverage that new facility in offshore, that will lower our overall operation and manufacturer costs.

Okay. All right. And then, Howard, that financial framework that you gave out for gross margin and operating margin, did I hear that correctly? 15% to 17%, and operating margin of 6% to 8% over the next two years?

That's correct.

Okay. And now when you say over the next two years, are you essentially saying that this is something that we should be thinking about for the fiscal year 2018, and fiscal year 2017 will represent an on-ramp towards that model?

It's a target model out there two years, Nehal.

Okay. All right. And while you did not have a 10% customer within the quarter, did you still have a 10% customer for the full fiscal year?

Yes, we did.

Okay. Thank you.

Mehdi Hosseini, SIG.

Just looking at the revenue mix, your data center revenues have been declining, and -- for the two consecutive quarters. And I am just trying to better understand. Is the ASP pressure coming from this specific segment, or is it more in the core server business? And I have one more follow-up.

Mehdi, this is Howard. With regards to the ASPs, again, it's a combination of all of our business. 18% of our business for this past quarter was the Internet data center part of it, and there is still another 80%, 82% that is other business areas. So again, it's a combination of all. With regards to that, the last couple of quarters from 26% to 18%, again, we haven't lost any customers. We are still competitive. It's just projects.

Okay. And how (multiple speakers)?

Even if we do not win those customers back, I created more new customers. I believe once our global operations system really stabilized, we will become very aggressive in that area.

Okay. And then with the embedded segment becoming 10% of your revenue, are you going to break this out going forward, so we could better model this?

Yes, IoT will be a very strong territory for us. Again, with our application optimized the [billion box] solution, we have a very good position to grow in IoT embedded market. And last year, again, first time we pay a separate product line, and we saw 30% growth. This year, no reason we cannot grow more than 30%.

We will be providing color, going forward, on it as separate product line.

Okay, great. And Howard, one for you. The cash cycle went up by three days. Any particular reason here?

It's more aligned to the lower balances underneath the dividers. We had lower revenues.

Got it. Thank you.

Brian Alger, ROTH Capital Partners.

As a follow-up on the declining revenues from the data center segment, that end market itself hasn't seen a decline in demand. Obviously it has been one of the fastest-growing segments within IT hardware in general, which clearly implies that you guys are losing share to someone, somewhere, even if it's project-oriented. Who is gaining market share at your expense? And is it purely on price?

I guess a combination of price, and also our response to customer demand. So we have really learned a big lesson: how to work with customer closer to respond to our customers even quicker. So that area which we are very aggressively done, and I believe we are ready for that.

As to our costs, our price competition -- and that's another reason why we restructured our global operation and production facility. And pretty much, we already are, I would like to say, 90% finished. So within next few months, we will have a much stronger operation, manufacturing facility, and cost structure in Asia. So that will support our growth in large data center business.

I guess, Charles, the question I have is, who is winning if you are losing? Is it the traditional large OEMs, like Dell and HP that historically have been lethargic and unresponsive, and not having dynamic product portfolios? Are they winning nowadays? Or have we seen the lower, more simpler ODMs -- the Compals, Foxconns, Hon Hai, et cetera, of the worlds -- improve in terms of their system expertise moving up the food chain to be more competitive against you?

Basically, we saw some from Asia.

Okay, thank you. I appreciate the help.

Aaron Rakers, Stifel.

Two real quick questions: first of all, can you talk -- there has been a lot of talk in the market about component pricing, particularly around drives, but also in the memory space. Have you seen pressures? And would you expect pressures from an upward pricing environment on the components to the gross margin line over the next couple quarters? (multiple speakers) And then I had a quick one.

Yes, we do see some change. It looks like that our market is kind of not less stable, right? So Q3, maybe the cost will be a little bit higher. But how much it would be higher and what would be the change, we still pay a close watch. And we try to -- we are pretty well prepared, I believe. And [it is the market changing].

Okay. And then the final question for me would be -- in the past, you have talked about the trajectory of how you thought you could grow your revenue. And I think in the framework of the model that you have provided, 15% to 17% and 6% to 8%, I am curious of how you see, if you look out over the next couple of years, what kind of revenue level supports, let's say, the midpoint or even the low end of that target model range.

Yes, we still are very -- try to be very aggressive to grow our revenue. That's why by end of 2017, we still try to shoot in of [$3 billion] of revenue. And that will have the scale and have our cost. And also, by the transition of production extending to Asia, that will help our cost structure, as well.

So I am really clear here, so you are saying you expect to be at an annual run rate of $3 billion, exiting fiscal 2017?

By December; December 2017.

Of the calendar year, okay.

(multiple speakers) Yes.

Thank you.

And that does conclude the question-and-answer session of our conference. I would like to turn the conference back over to Mr. Liang for any closing remarks.

Thank you for joining us today. And we do 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 that Super Micro fourth-quarter and fiscal-year 2016 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.