超微電腦 (SMCI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated First Quarter Fiscal 2017 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 Presentations tab. During the Company's presentation, all participants will be in a listen-mode. Afterwards, security analysts and institutional portfolio managers will be invited to participate in a question-and-answer session. But the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded Thursday, October 27, 2016. A replay of the call will be accessible until midnight Thursday, November 10, 2016 by dialing 1-844-512-2921 and entering replay PIN 8620920. International callers should dial 1-412-317-6671.

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, and thank you for attending Super Micro's conference call on the financial results for the first quarter fiscal 2017, which ended September 30, 2016. 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'll 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 2016, 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.

And 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 10. Let me provide you with a summary of our first quarter. Revenue was $529 million. It's 0.9% higher than last quarter, and 1.8% higher year over year.

Non-GAAP net income was $16.7 million. It's 60.9% higher than last quarter, and 1.1% higher year over year. Non-GAAP earnings per share was $0.32 per diluted share, compared to $0.20 last quarter and $0.32 last year.

We are pleased that Super Micro was able to report revenues and profits at the higher end of our expectations for the first quarter. Last quarter system sales were 67.6% of revenue, with 50% of revenue coming from direct customers. The key market segments that drive our system business include, first, storage was 23.5% of total revenue, up 10% from last year, and 24% from last quarter. Again storage sales through the hyper-converged and the software defined market both performed strongly. We have seen an increased number of customers adopt all-flash NVMe solutions and expect strong NVMe system growth in 2017.

Internet datacenter and cloud comprised 12.8% of total revenues, down from 25% last year, and down from 18% last quarter. We took some time the past couple of quarters to build the pipeline in this segment. Now we are armed with products that offer new designs with better value. We are executing to win in the near future in this large volume segment. Despite feeling some margin pressure, we are confident the cloud datacenter will continue to help grow our economic scale and market share.

IoT and embedded comprised 10.7% of total revenue, and was up 12.9% over last year, and up 10.2% from last quarter. A key driver of our success has been the focus on dedicated IoT and embedded teams to drive the business.

From a geographic perspective, Europe and Asia show strong improvement from last year, with Europe contributing 21.5% of revenue, and Asia contributing 18.2%. The US market was 55.9% of revenue, representing a healthy balance of US and international revenue.

Last quarter we discussed the restructuring of our global operational infrastructure, including our new SAP implementation, global tax restructure, and a bonded warehouse. This quarter we saw much smoother operations, and reduced impact from the transition. We expect to 100% complete the transition in this December quarter, and see sustained long-term improvement to our operational efficiency and profitability.

The overall IT infrastructure market is experiencing moderate growth according to most of the analysts. But particular segments of the market are growing 3 to 4 times faster than the overall market. Most of our focus is on the faster-growing market segments like next-generation storage, high-density Twin, and Blade architecture, Rack Scale cloud solutions, embedded and IoT, and accelerated GPU computing.

No other company is better positioned to lead in these market segments than Super Micro, which will create a big growth opportunity for our business.

Our Blade portfolio of workload optimize system deliver tangible performance and efficiency advantage, and we are consistently first to market with key new technology innovations that enable our customer to deliver differentiated, more powerful and efficient solutions.

Super Micro is the leader in the next-generation storage market, providing NVMe, All-Flash NVMe and hybrid storage solutions to our customers, including the top storage OEMs in the world.

We have the most complete storage portfolio, with more than 70 NVMe server storage systems that deliver orders of magnitude better performance, multiple times the price performance and efficiency than traditional storage solutions. Including the Simply Double architecture and the 60-bay and 90-bay capacity optimized storage platforms using the [new M.2] and dual NVMe interface.

We continue to define the state-of-the-art architecture by introducing the first 2U 48 All-Flash NVMe solution with dual system and data passed redundancy, bringing All-Flash NVMe to the mission-critical enterprise. As a result of our 20-year strategy and investment, storage has become one of our largest revenue and faster-growing segments.

In Rack Scale cloud datacenter, we saw outstanding growth in the quarter, while (inaudible) center introduced MicroBlade products. We have had several major large-scale customer wins for MicroBlade that were based on MicroBlade's combination of high-performance, high density and networking and higher efficiency.

We also continue to offer our [priorities], the most innovative multiple node system portfolio, including the Twin Family, FatTwin, and MicroCloud; and have consistent growth of that portfolio with particularly strong growth for MicroCloud.

The ramp of our new Broadwell system is well underway. And we are starting the transition to Skylake platform, and are working with the customers and our key technology partners to offer early [assembly] for qualification or next-generation processor, which we'll launch next year. And we continue to see 100% growth of our software, especially system management software, and global service portfolio, providing reliability, serviceability and quality for our expanding enterprise customer base.

Our IoT and embedded business again provided one of the bright spots of the quarter. We grew approximately 3 times faster than the overall IoT market, as measured by IDC. Our new platform based on Xeon-D atom processor, provides a higher performance, efficiency and reliability; enabling our OEM customer in networking, security, communication, and storage to build richer, more powerful embedded solutions.

We also expanded our product line with new low-power and smaller form factor IoT solutions, with successful customer engagement, including medical imaging, security, and (inaudible) manufacturing and retail as well.

In short, we expect to see a 30% plus in IoT and embedded this fiscal year. We have established a leadership role in accelerated computing, and are an earlier enabler of people learning, machine learning, and artificial intelligence solutions, and provide a complete portfolio of both NVIDIA and Intel-based systems to enable a broad scale adoption of accelerated computing.

We have been first to market with both that maximizes our performance and advantage of both new NVIDIA Pascal GPU and new Intel KNL advanced landing process. We have designed workload optimized platforms that can deliver unparalleled performance, including our new 4U system support in up to 10 PCI-E NVIDIA Tesla P100 accelerator, for up to 187 teraflops peak performance in 4U.

With the Intel, we introduced the new Xeon Phi x200 processor in both 2U form factor and in tower form factor. The 2U form factor, indeed is included in [4 nodes] of KNL with integrated [OmniPass]. And we have been seeding the market with the industry, first the Xeon Phi 200 systems for development in community, and shipping hundreds of those systems over the last few quarters.

We see accelerated computing as a source for major new innovation and focus to be the leading system provider in this transformational market.

In summary, we are excited about our opportunity for continuing growth and the new products and technology we are developing. We will continue to execute to be first to market with the latest technology. That is Skylake, dual-port NVMe, embedded backup power supply, and the broadest portfolio of choice for our customers. And we expect to continue strong growth going forward.

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

Thank you, Charles. And 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 expense. A 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 first quarter income statement. Please turn to slide 4. Revenue was $529 million, up 1.8% from the same quarter a year ago, and up about 0.9% sequentially. The increase in revenue from last year was primarily due to our increase in subsystems and accessories, which was up 4.9%. This was consistent with the increase in sales to distributors, which was up 11.6%.

In terms of verticals, we saw growth in next-gen storage, enterprise, and HPC at 36.9%, 127%, and 97.5% respectively; offset in part by a decline in our internet datacenter and cloud of 47.2%.

On a geographical basis, we had strong growth in Europe of 31%, followed by Asia at 29%, while the US was down about 12.7%. The sequential increase revenue was primarily due to improvement in our service solutions, which was up 4.2%, due to more sales from our next-gen and open storage business, which grew 26.6% and 21.8%, respectively; as well as growth in our enterprise business of 227%, which was offset by the decline in our internet datacenter cloud of 28.8%.

On a geographical basis, Europe was up 24.2%. Asia was up 16.5%, while the US was down 9.4%.

Slide 6, turning to product mix, the proportion of revenue from server systems was 67.6% of total revenues, which is down from 68.6% the same quarter a year ago, and up from 65.5% last quarter. We will begin to provide the compute nodes which we have shipped during the quarter, since we believe it gives an idea of the increasing density with which our solutions are providing.

We pioneered the concept of multi-node systems about 10 years ago, with the introduction of our Twin architecture, and continue to lead the way in this area. We shipped approximately 122,000 nodes in the quarter, which compares to 130,000 in the prior quarter, and 116,000 in the prior year. ASPs for compute nodes was about $2,900 per compute node, versus $2,600 per node last quarter, and $3,100 per node last year. We shipped approximately 1,144,000 subsystems and accessories.

We continued to maintain a diverse revenue base, with over 700 customers. No customers represented more than 10% of our quarterly revenues. Cloud internet datacenter revenue was 12.8%, which was a decrease from 18.1% in the prior quarter, and from 24.7% in the prior year. 55.9% of our revenues came from the US, and 50% from our distributors and resellers.

Slide 11; non-GAAP gross profit was $80.4 million, up 10.9% from $72.5 million in the same quarter last year, and up 8.5% from $74.1 million sequentially. On a percentage basis, gross margin was 15.2%, up from 13.9% a year ago, and up from 14.1% sequentially. Price changes from Ablecom resulted in no basis point change to gross profit in the quarter, with total purchases represented approximately 11.2% of total cost of goods sold, compared to 13.2% a year ago, and 12.4% sequentially.

The year-over-year increase in gross margin resulted from lower percentage of product mix from our internet datacenter cloud revenue. Utilization on a global capacity basis was about 51% compared to about 71% a year ago. This resulted in approximately a 20-basis-point effect on gross margin.

Sequentially, gross margin was up 1.1%, primarily due to products mix, as well as lower warranty reserves of 10 basis points. Utilization of our global capacity was about the same at 51% compared to last quarter.

Slide 12 and 13, operating expense was $55.7 million, up from $47.1 million in the same quarter a year ago, and down from $57.9 million sequentially. As percentage of revenues, operating expenses was 10.5%, which is up from 9% in the same quarter a year ago, and down from 11% sequentially.

Operating expenses were higher on an absolute dollar basis year over year, primarily in R&D, as we invest in personal expenses and materials to support the development of our total solution. We increased 165 heads in R&D, which is about 17.1% increase.

Sequentially, operating expenses were lower, due to lower material and testing fees of about $3.7 million, and lower marketing and promotion and trade-show costs of $2.6 million, offset in part by annual salary increases of $3.2 million. The Company's headcount increased by 32 sequentially to 2,731 total employees, primarily in R&D.

Operating profit was $24.7 million, down by 2.4% from $25.3 million a year ago, and up by 52.5% from $16.2 million sequentially. On a percentage basis, operating margin was 4.7%, down from 4.9% a year ago, and up from 3.1% sequentially. We continue our efforts to leverage the investments we have made during the past year.

Net income was $16.7 million, up 1.1% from $16.5 million a year ago, and 60.9% from $10.4 million sequentially.

The non-GAAP fully diluted EPS was $0.32 per share, which is the same as $0.32 per share a year ago, and up from $0.20 per share sequentially. The number of fully diluted shares used in the first quarter was 52,192,000.

The tax rate in the first quarter on a non-GAAP basis was 31.7% compared to 34.2% a year ago, and 34.4% sequentially. The effective tax rate for the first quarter of fiscal year 2017 was lower than last year due to the reinstatement of the R&D tax credit in December of 2015. The sequential decrease in the tax rate was due to less impact from the new global corporate structure, which we implemented on May 1, 2016.

We expect our effective tax rate to be 32% in the second quarter of fiscal 2017, as we continue to improve our execution of the new corporate structure, as we grow our business overseas, and ship our offshore business which are being serviced by the US, from the US, to our offshore location.

Turning to the balance sheet on a sequential basis, slide 14 and 15. Cash and cash equivalents and short and long-term investments were $149.4 million, down $34.3 million from $183.7 million in the prior quarter, and up $35.8 million from $113.6 million in the same quarter last year.

In the first quarter, free cash flow was negative $22.7 million, primarily due to an increase in inventory of $54.9 million, and an increase in AR of $39.34 million, offset in part by an increase in accounts payable of $43.4 million, and net income of $13.5 million.

In addition, we repurchased $18.5 million of stock during the quarter. Accounts receivable increased by $39.3 million to $328.3 million due to higher revenue sequentially. The DSO was 54 days, an increase of 4 days from 50 days in the prior quarter. Inventory increased by $51 million to $500 million to support the higher revenue forecast for the second quarter. Days in inventory was 97 days, an increase of 3 days from 94 days in the prior quarter, and from 95 days in the prior year.

Accounts payable was $38.4 million, which was 55 days, an increase of 2 days from 53 days in the prior quarter, and down 3 days from 58 days in the prior year.

Overall, cash conversion cycle days was 96 days, which is 5 days higher than the prior quarter. We continue to guide that the cash conversion days and the ratios above will be reviewed on an annual basis, since there is seasonality in our business which affects the ratios quarter to quarter.

Now for a few comments on our outlook, as we enter the second quarter of our fiscal year 2017, we saw a growth in the number of market verticals, which highlights the many opportunities and the diversity of the markets we can pursue. We continue to drive on this strength, leveraging investments we have made to grow top line and profitability, in a seasonally strong quarter for the industry.

Therefore, the Company currently expects net sales for the quarter ending December 31, 2016 in the range of $570 million to $640 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.38 to $0.52 for the quarter. At the midpoint, this would represent a decrease of about 5.3% of revenue and 38.4% in EPS from the prior year.

The targets reflect our strategy to take advantage of the opportunities we have to take market share and keep growing, keep control of our operating costs. As of 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 prices.

As of September 30, 2016, we purchased 888,097 shares of our common stock, totaling $18.5 million at an average price of $20.79 per share. 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 any portion thereof at any time.

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

Thank you, Howard. In summary, our outlook for December quarter well reflects our seasonally strong expectations, good backlog, and a stronger growth in our key market segments. We expect this quarter to see a continued contribution and stronger demand from storage, IoT, MicroBlade, and the GPU accelerated computing, and a surge in demand in cloud and internet datacenter.

Moreover, we still expect the completion of our new global operation infrastructure. We will achieve sustained long-term improvement to our efficiency and profitability. Indeed, we are very excited about today's market opportunity. And I believe no other company is better-positioned to win in the IT universe structural market than Super Micro.

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

(Operator Instructions) Rich Kugele, Needham & Company

Thank you. Good afternoon. A few questions, so I guess first a clarification. Howard, can you repeat the growth rates for next-gen, enterprise, and HPC? HPC in particular, I didn't catch, but it sounded like it was almost 100%. Can you just clarify that?

Yes, Rich. So on a year-over-year basis, next-gen storage, enterprise, and HPC in this order, 36.9% for next-gen storage, 127% for enterprise, and 97.5% for HPC. That was on a year-over-year basis. And then on a sequential basis, next-gen and open storage grew at 26.6%, and 21.8% and our enterprise business grew at about 227%.

Okay. And far as the HPC side goes, is there any commentary you can provide? Any particular environments that's going into, or any unique configurations you can talk to?

Yes. I think we had some nice wins in the educational area. We think we publicized one with regards to Rutgers University, [a bit] in the HPC area. That was on an OmniPass type of platform, and it was a very good installation for us.

Okay. And then in terms of just where we are in the process or cycle, can you just talk about demand for the current series of Intel products and any early indications on demand for the future launches earlier next year?

Yes. (Inaudible) our product line, we have continued to grow in kind of both NVIDIA and Intel, just on the new GPU and kind of deep learning, machine learning [co-processor] are available. So we have a strong product line for both-- for the products from both companies. And we expect quick growth.

As to NVMe, including dual port NVMe for enterprise, we have, I believe, the strongest product line in the world. And that product line is fully ready and in growing mode.

Okay. And so you were referring to Pascal and KNL with NVIDIA and Intel, right?

Both product lines now we see a very strong demand.

Okay. Excellent. I'll get back in the queue. Thank you very much.

Nehal Chokshi, Maxim Group

Thank you. And congratulations on a strong quarter, great gross margin, and good guidance here. Especially impressive in the context that datacenter sales were down 47% year over year and 29% Q over Q. So can you talk a little bit further about why the datacenter sales continues to decline, especially on the Q-over-Q basis?

Yes. Nehal, this is Howard. Thank you for the kind remarks. With regards to the Internet of Things and cloud, we talked about it, quite frankly at the beginning of the quarter, as we saw a big buildout in datacenters last year, per se. Those buildouts have been done, per se. And now we're looking at more of technology refresh and demand for additional supplying into those datacenters.

So again, we talked about that. We put that in our guidance. And we have great opportunities there to continue to grow as we refill our pipeline in that area.

Yes. But kind of like, you may know, we have one or two customers who slowed down a little bit for a few quarters. [My instinct] is that we get, I will have to say, another couple of very good-sized enterprise-like datacenters. So overall, sales is, opinion is we will pick up very soon again.

Okay. And so the share loss at the hyperscale that was lost last quarter, it doesn't seem like any of that was clawed back during this quarter, correct? You were projecting that to be clawed back in future quarters.

We see it gradually, gradually coming back.

Gradually. Okay. And then when you do exclude the hyperscale business, the rest of the business was up 18% year over year. And so was it 100% attributable to these three verticals that you talked about; next-gen storage, enterprise, and high-performance computing? Or are there other elements as well?

Well the channel itself, Nehal, would be there, and also IoT, again, as Charles mentioned earlier too. They were all growth areas for us. And this really emphasizes all the markets that we play into, all the verticals.

Got it. Okay. Thank you.

Yes, especially the global market, including Asia and Europe. We start to see good growth start from a couple of months ago. And this trend will be continued. Because we started to focus on European and Asia market about 4 or 5 months ago.

Okay. Thank you. I'll get back into the queue.

Aaron Rakers, Stifel

Yes. Thanks for taking the questions, and also congratulations on the quarter. I'm just curious as you kind of now talk more and more about the growth in the IoT segment. Who do you view as your primary competitors in that market? I know Hewlett Packard talked a lot about it. I think it was called their Edgeline product at their recent Analyst Day. I'm just curious what you're seeing competitively in that market, and whether or not you've seen any signs of that changing.

Yes. I mean since 2 to 3 years ago, we started to refocus on our IoT and embedded market. So now we have a strong dedicated team, folks in this area. And we can see a consistent growth. I remember last year we grew about 30% in IoT. This year, I believe, we'll be at least (inaudible) growth or higher.

Okay. And then as it relates to kind of upcoming or future Intel product cycles, really it looks like really good December quarter guidance. I'm just curious if you have any thought at this point as we look into the first part of calendar 2017, and we sit in front of, I think, the next architectural change for Intel, how we should think about that seasonality or whether or not there's any kind of pause in front an Intel cycle like Purley or Skylake.

Indeed, for December quarter or Q1 next year, the major growth will be our NVMe technology, storage strong platform, IoT, and some new high-density architecture like BigTwin. And as to Intel next year, (inaudible) process of Skylake I believe will start ramp up maybe earlier next year.

And then real quick clarification, just curious, what gross margin are you assuming on the guidance for this third quarter?

We haven't given gross margin guidance, Aaron, per se.

Okay. Okay. I'll get back in queue. Thanks.

Mehdi Hosseini, Susquehanna Group

Hi. This is David Ryzhik for Mehdi Hosseini. Thanks so much for taking the question. Can we get a sense of what capacity utilization was in the September quarter, what your expectation is in the December quarter, particularly in the context of the declining high-volume business? Thanks. And I have a follow-up.

Yes. This is Howard. It was 51% globally in the September quarter. And obviously as we expect, we've guided revenues higher sequentially, so we do expect the capacity utilization to go up in the next coming quarter.

Maybe from 51% to 65%, kind of--

Great. And the higher inventories, the build to $500 million, is that largely in anticipation of some of the return of the high-volume datacenter business?

Indeed, this quarter, December, we expect $600 million, $605 million the middle range. Yes. So indeed, we have-- indeed I would like to say many new customers or kind of old customers growing. So in the last few quarters we have some 10% customer and in the December quarter maybe not something [like that].

As you say, we have more customers.

Great. Got it. And so just circling back to datacenter, is most of the decline concentrated in one customer, or is broad-based in your datacenter clientele?

[In order to say] now we focus on many more datacenter. Again, because our whole company structure had been growing, service team growing, system team growing, capacity growing. So now we are able to focus on many more customers, basically.

Got it. Thanks, Charles. And as far as OpEx for the December quarter and just the balance of fiscal 2017, how can we think about how that moves forward, just any insight in how to model that would be great. Thank you.

Yes. This is Howard. Again, we're going to be watching it, trying-- last year was a big year for us with regards to investments that we did, with regards to SAP and the global reorg that we did. And so again, a lot of the investments have been made. We will get back to trying to leverage those investments and take a look at growing our operating expenses at a slower pace, let's say, than our revenues.

Great. Thanks so much. I'll get back in the queue.

Alex Kurtz, Pacific Crest

Hi, guys. This is Steve Enders on for Alex. Thanks for taking my question. I was wondering if you guys [have seen] the competitive dynamics and web-scale change quarter over quarter, and especially how does it look across regions, US and Asia in particular?

Steve, just to make sure I heard the question. Are you talking about the competitive environment in the web-scale or hyperscale area? Is that what your question was?

Yes. Correct.

Yes. The competitive environment is still tough out there, quite frankly. I think in the US we see the same guys out here in the US. Overseas we see a number of more competitors out there, primarily from offshore, Asia type competitors. So I guess in that front, it's still competitive as it's always been, quite frankly.

Although when we go into a seasonally strong quarter, I guess there's a bigger pie for all of us to shoot for. So it gets a little bit less on the competitive front. But in general, the competitive landscape is still as competitive as it's always been.

Yes. The good thing is that before because our capacity was limited. So we would not be able to promise (inaudible) to many customers. But now we have much higher capacity. We are gradually engaged with more customers now.

Okay. Great. Thank you.

Nehal Chokshi, Maxim Group

Yes. Thank you. So I wanted to actually tag onto the commentary around the international versus the US. US was very lackluster in terms of year-over-year growth, while all the other geos bounced back much more strongly. Can you give us some color around why for that dynamic?

Yes, I think well, quite frankly from the internet datacenter, a lot of the projects, if you compare from last year were, quite frankly, centered in the US. So again, as that buildout was finished from last year to this year, that's why you saw the revenue decline, quite frankly, in the geo in the US.

So I wouldn't characterize it as more competitive as more as buildout for the internet datacenter decline in revenue.

Got it. Understood. Okay. And then your guidance range has been slightly tightened relative to last quarter. I think last quarter you had an $80 million range. This quarter you have a $70 million range. Is this a correct read to say that you feel like you have better visibility going forward now?

A little bit. But most importantly is now we have more-- we have to say more big customers, not (inaudible).

Okay. Got it. And then one more question so, Howard, you did note that your cash conversion cycle was up 5 days year over year. I didn't catch were the components behind that, and more importantly, can you discuss whatever the component was behind the increase in that cash conversion cycle, what was the reason behind that component.

Yes. I think one of the-- if you look at the cash conversion cycle being up 5 days, I think 3 of those days were in inventory. As I talked about on the call, we're preparing for a larger forecast in the December quarter. So seasonally that's up to 97 days versus 95 in the prior quarter. So again, up a couple of days there.

AR was up a bit too in there. And we're bringing on, as we talked about, larger customers, some enterprise customers, those types of things. And their days are typically at longer terms for us. And so that's increasing our cash conversion cycle as well.

Okay. I guess the key thing that I'm trying to key in on here is that as you look out to fiscal year 2017, the dynamic has always been that cash conversion cycle has varied around, and when it's contracting you generate cash. And when it's expanding, you've been consuming cash. Any perspective you can share on how you think the whole year will play out in terms of free cash flow generation?

Well, we haven't given that guidance out there. We will say that, like I said, we're still targeting in the mid-- as cash conversion cycle, I think if you look at the fiscal year 2016, we had about in the mid-80s, about 85 for the full year. We're still targeting around that range.

Okay. Thank you.

Brian Alger, ROTH Capital Partners

Good evening, guys. Nice to see the bounce back here. I've been bouncing between calls, so if this has been asked, please forgive. Last quarter there was a discussion of a number of things that kind of went against us. I'm guessing that at this point the SAP implementation is largely complete. I'm curious if the tax optimization has also been completed at this point in time.

Yes. I mean much better. That's why I say by this December quarter, after December quarter, I believe we will be 100% back to normal. And then beyond that, we have been much better than before, getting better than before.

Right. Excellent. It's good to see that kind of getting behind us and getting the headwinds out of the way. One quick bookkeeping question; as we look at the IoT and the embedded opportunities, are those revenues showing up in the systems business, or is this more in the other revenue segments?

Still a combination, system and key component, both. But again, computer system portion ratio we're continuing to grow. Because more and more customers (inaudible) for a complete solution.

I mean is there a difference between what you guys are now classifying IoT in that relative to where the other embedded systems are? I guess I see a huge opportunity in Internet of Things, and it obviously encompasses a lot of different things, certainly different than your embedded products, which tend to be more systems type of devices. I'm trying to understand when we look at the revenue segmentation, how that's going to impact things.

Now I guess it will be more both together. IoT and embedded are together as one category.

Right. Right, but back to your question though, like I said, there are edge servers and those types of devices that are going out there that are more complete systems in our definition out there. So again, that ratio that Charles talked about earlier about more complete systems, that's what we're talking about.

Okay. Great. Thanks, guys.

David Ryzhik, Susquehanna Group

Hi. Thanks so much taking the follow-up. I think you mentioned enterprise grew 127% year over year. What product lines in specific are resonating with your enterprise customers? Thanks.

Yes. That's actually one of the products that Charles talked about the MicroBlade product. It's a great product that we come out with that's being very well-received. Let's put it out there.

And how do you-- do you guys have a target as far as what percent of the enterprise kind of grows into as a percentage of overall revenue, given that it's kind of such a large market and you're just kind of scratching the surface.

Yes, indeed, I believe we will continue to grow in both, in the enterprise and big datacenter both. Because our capacity is growing, so we will be able to cover both. And our SuperBlade, indeed the (inaudible) product line, we'll be seeing that MicroBlade, if not [better]. So we have good confidence in the enterprise business in the near future.

Great. Thank you. And just a final one for me, the IoT embedded, I recall-- I believe it's higher than corporate gross margin profile. Any more detail, like what particular average gross margin that business is selling at? It would be real helpful. Thanks so much.

Okay. David, no. We've always described it at higher than corporate average gross margin. And that's the guidance we'd give it.

Thanks so much, appreciate it.

It appears at this time we have no further questions. I'd like to turn the call back over to Mr. Liang for any additional or closing remarks.

Yes. 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 first quarter fiscal year 2017 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.