超微電腦 (SMCI) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. Second 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 it has made available to participants which can be accessed in a downloadable [PFD] format on its website at www.SuperMicro.com in the Investor Relations section, under the Events and Presentations tab.

(Operator instructions) As a reminder, this call is being recorded Thursday, January 26, 2017. A replay of the call will be accessible until midnight Thursday, February 9, 2017 by dialing 1-844-512-2921 and entering replay PIN 7473642. 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 financial results for the second quarter Fiscal 2017, which ended December 31, 2016. By now, you 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.

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

Thank you, Perry, and good afternoon, everyone. Please refer to slides 4 through 10. I will now summarize our second quarter. Our revenue over this period was $652 million. It's 23.3% higher than last quarter and 2% higher year-over-year. Non-GAAP net income was $25 million. This is 50.1% higher than last quarter, and 34.1% lower year-over-year. Non-GAAP earnings per share was $0.48 per diluted share, compared to $0.32 last quarter and $0.73 last year.

We are pleased to report an all-time record high quarterly revenue of $652 million, which exceeds our guidance. We achieved this record revenue against a tough compare, which included a 15% customer last year. Having a more diverse customer set provides a stronger base for our return to our faster growth trends. In fact, we now have many more customer engagements than ever, from the Fortune 500 and Global 1000 companies. Where most of them are still [new partner] to us, this means we have viewed our reputation, the [product structure] and production capacity that these large-scale enterprise customers trust. With these assets, our strength and long-term growth become much healthier, in both revenue and profitability.

As I have mentioned in the previous quarters, we have been building a much stronger foundation by enhancing our technology operations and global on-site service as we evolve into a true Tier 1 server and storage solution company. This past quarter, the industry faced some challenges from tightening in the supply of memory DIMM, and then Flash. We saw a 30% price hike in some cases. [Our skip] had significantly impact on some orders. However, I am pleased that we are able to overcome this challenge, since our relationship with vendors and [thirty mentally] systems are much stronger than ever before, and are able to help our customers continue on with their business. Page 8, please.

From a geography perspective, our continued effort and investment to expand globally and deliver better global distribution of our revenue. The US market accounts for 55%, Asia 21%, and Europe 20%. Asia has shown a very strong momentum, up 43% from previous quarter. In particular, our China business, where we have focused on being a technology enabler to our partner in China was very strong, been up 53% year-over-year. Last quarter, it was announced that Super Micro had partnered with Fiberhome, a telecom technology company in China, to form a joint venture -- to form, to further pursue our strategy of working with local partners. With our 30% stake in that joint venture, Super Micro will share technology important to enable the local development of solutions, for certain important [political] market in China.

We look forward to growing this relationship in the years to come. Next page, please.

Now, let's talk about specific product segments. Enterprise private cloud is a key to our revenue growth strategy this year, and it grew 221% from a relatively smaller [base]. We saw outstanding growth in the quarter. For our recently-introduced MicroBlade product, we save major large-scale customer wins in the quarter. Most notably, a sizeable installation happened here local in Silicon Valley.

The [said] data center achieved a super-efficient 1.06 power usage effectiveness, PUE, optimized by the MicroBlade's outstanding thermal structural design. Now, MicroBlade design also support record high computing density, at [200 AP Xeon computing] nodes per 19 inch rack. We introduced our first-generation Twin design. the new Big Twin is the industry's most optimized multiple-node twin architecture. They're put in [full range] of CPU, up to 205 watts. Maximum memory with 24 DIMM, all-Flash hot-swappable NVMe, and powered by the patented Titanium Efficiency Powerstick power supply.

Our R&D teams are well in the developing cycle of our [X11 DP] products which is based on the next generation Intel Xeon, code name Skylake, processor. We are again, aimed to be the first to market with the optimized Skylake system. Some system [seeding process] have already been underway. We are continuing to see strong, 90% year-over-year growth in our combined management (inaudible) and global service business, providing durability, serviceability and quality for our expanding enterprise customer base.

As to accelerated computing solutions for deep learning, machine learning, and artificial intelligence, was 6% of total revenue, up 122% from last year. Deep learning applications require processing power of multiple GPUs that communicate efficiently and effectively to [expand the] GPU network. Super Micro's single-root GPU system allows multiple GPU to communicate with minimal latency and maximum bandwidth. The single [root] [PCI-EB] line have been proven to dramatically improve GPU peer-to-peer communication efficiency over [QPI], which up to 31% higher QPI throughput, and 60% lower latency compared to previous generation products.

Our new 1U 4 Pascal GPU design incorporates the latest [NVLink GPU] interconnect, with independent GPUs thermal [zone] ensuring uncompromised performance and stability.

The new 4U design supports up to 10 PCIe Pascal GPU and delivers up to 187 teraflops peak performance, per system.

Storage was again one of our strongest segments, with 24.3% of total revenue, up 19.7% from last year. Our next generation storage partners account for 48% of this storage revenue, and grew a strong 55.6% year-over-year. We have the best and [brightest] portfolio of All-Flash NVMe systems in the industry, which is 60-plus systems available today. We have several significant cloud and enterprise NVMe design wins in the quarter, as customers can only find a truly optimized NVMe solution from Super Micro.

New for our quarter, we introduced an advanced SBB platform, the 2U 40 drive All-Flash NVMe dual-node [dual-pass] system. Our traditional storage such as simply [dabbled] 2U40A, 4U19 and 4U60 driver systems. Also, strong growth as many customers prefer completed system build, and that (inaudible) device, Super Micro resulting in superior system quality. We also like it since it significantly improve customers' quality and service satisfaction.

In summary, this quarter we have begun to return to a robust growth pace. That had been our legacy. MicroBlade, NVMe, Big Twin, and the upcoming X11 Skylake will have drivers, this grows even further. With our strong foundation in place, we have more opportunity for large customer engagement than we had ever before in our history, especially our Fortune 1000 enterprise private cloud customers. We expect to take advantage of this tremendous opportunity and reach new highs.

For more specific on our second quarter, let me transfer 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 in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with a review of the second quarter income statement. Please turn to slide 4.

Revenue was $652 million, up 2% from the same quarter a year ago, and up about 23.3% sequentially. The increase in revenue from last year was primarily due to our increase in subsystems and accessories, which was up 12.3%. This is consistent with the increase in sales to distributors, which was up 12.4%.

In terms of verticals, we saw growth in next-gen storage enterprise and HPC up 55.6%, 220.7%, and 122.3% respectively, offset in part by a decline in internet data center cloud of 52.6%.

On a geographical basis, we had strong growth in Asia of 55.9% followed by Europe at 14%, while the US was down about 12.1%. The 23.3% sequential increase in revenues was primarily due to an improvement in server solutions, which was up 24.2% due to more sales from our next-gen and open storage business, which grew 25.4% and 28.9% respectively, as well as in the internet data center cloud of 31.3%, HPC of 92.3%, and our enterprise business of 43 (technical difficulty).

On a geographical base, all regions showed seasonal strength, with the US up 21.1%, Asia up 43.1%, and Europe up 14.4%. In particular, China was up 71.4% as we leveraged our existing partnerships and created new partnerships such as the one with Fiberhome Telecommunications Technologies, Ltd., a major telco infrastructure provider in China. Slide 6?

[Experienced] product mix, the proportion of revenues from server systems are 68.61% of total revenues, which was down from 71% the same quarter a year ago, and up 67.6% last quarter. We begin to provide the complete compute nodes, which we have shipped during the quarter, since we believe it gives an idea of the increasing density which our solutions are providing. We pioneered the concept for 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 145,000 nodes in the quarter, which compares to 122,000 in the prior quarter and 133,000 in the prior year. ASPs per compute node was about $3,100 per node versus $2,900 per node last quarter, and $3,400 per node last year. We shipped approximately 1,214,000 subsystems and accessories, which is up from 1,092,000 last year, and 1,144,000 last quarter.

We continue to maintain a diverse revenue base with over 700 customers. No customer has represented more than 10% of our quarterly revenues.

Cloud internet data center revenues was 13.8%, which was an increase from 12.8% in the prior quarter and a decrease from 29.7% in the prior year. 55% of our revenues came from the US and 46.2% from our distributors and resellers. Slide 11?

Non-GAAP gross profit was $93.7 million, down $12.1 million from $106.6 million in the same quarter last year, and up 16.6% from $80.4 million sequentially. On a percentage basis, gross margin was 14.4%, down from 16.7% a year ago and from 15.2% sequentially.

Price changes from [Davicom] resulted in no basis point change to gross profits in the quarter, with total purchases representing approximately 11.6% of total cost of goods sold, compared to 13.4% a year ago, and 11.2% sequentially. The year-over-year decrease in gross margin of 2.3%, primarily due to the cost of memory and SSD components causing cost increases which we could [not] pass on to some server customers, as well as many other of our service systems being based on mature, late-life-cycle processors such as GP, such as [Grantley], which mean lower prices.

Geographically, we had higher sales in Asia where pricing is typically more competitive. Utilization on a global capacity basis was lower, at about 65.8%, compared to 75.2% a year ago. This results in approximately 10 basis points negative effect on [gross margin].

Sequentially, gross margin was down 80 basis points, primarily due to the cost of components such as memory and SSD rising during the quarter, causing some cost increases which could not be passed on to some server customers. This is offset in part by higher utilization of our global capacity, which was at 65.8%, up from 51.5% last quarter, which resulted in 30 basis points gross margin improvement. Slide 12 and 13?

Operating expenses were $57.2 million, up from $53.5 million in the same quarter a year ago, and from $55.7 million sequentially. As a percentage of revenue, operating expenses was 8.8% which is up from 8.4% in the same quarter a year ago, and down from 10.5% sequentially. Operating expenses were higher on an absolute dollar basis, year-over-year by 7%, primarily in R&D as we invested in personnel expenses to support the development of our Total Solution and roll our new products for the upcoming technology refresh cycle.

We increased 139 heads in R&D, which is about 13.8% increase. Sequentially, operating expenses were higher by $1.6 million, or 2.8%, due to higher sales and marketing expenses due to promotional and trade show expenses of $1.5 million and increased sales payments of about $600,000 due to higher sales revenue, and $900,000 higher R&D compensation expenses. This is offset in part by $1.1 million of foreign exchange gains, and $1.1 million lower audit and legal fees. The Company's total head count increased by 66 sequentially, to 2,797 total employees, primarily in the operations to support the growth of the business.

Operating profit was $36.5 million, down 31.4% from $53.1 million a year ago, and up by 47.6% from $24.7 million sequentially. On a percentage basis, operating margin was 5.6%, down from 8.3% a year ago, and up from 4.7% sequentially. We continue efforts to leverage the investments we have made during the past year. Net income was $25 million, down 34% from $38 million a year ago, and up 50.1% from $16.7 million sequentially.

Our non-GAAP, fully-diluted EPS was $0.48 per share, which was down from $0.73 per share a year ago, and up from $0.32 per share sequentially. The number of fully-diluted shares used in the second quarter was 2,555,000 shares.

The tax rate in the second quarter, on a non-GAAP basis, was 30.5% compared to 28% a year ago, and 31.7% sequentially. The effective tax rate for the second quarter for the fiscal year 2017 was higher than last year, due to the reinstatement of the Federal Reserve R&D credit in December 2015. The sequential increase in tax rate was due to continued improvements in our new global corporate structure which will be implemented in [May 1, 2016].

We expect our effective tax rate to be about 25% in the third quarter of Fiscal 2017 due to the release of liability for completion of an audit, tax audit, and as we continue to improve our execution of our new corporate structure as we [go all business] being served offshore.

Turning to the balance sheet on a sequential basis, slide 14. Cash and cash equivalents, and short- and long-term investments were up $131.5 million, down $17.9 million from $149.4 million in the prior quarter, and down $41.1 million from $172.6 million in the same quarter last year. In the second quarter, free cash flow was a negative $49.6 million, primarily due to the increase in inventory of $101.9 million, and an increase in AR of $38.9 million, offset in part by an increase in accounts payable of $53.4 million and net income of $22 million. Slide 15.

Accounts receivable increased by $38.6 million, or to $366.9 million, due to higher revenue sequentially. Days sales outstanding was 49 days, a decrease of 5 days from 54 days in the prior quarter. Inventory increased by $99.3 million to $599.3 million. Days in inventory were 91, a decrease of 6 days from 97 in the prior quarter, and an increase of 9 days from 82 in the prior year. The increase is primarily to support the tight supply of memory and SSD, as well as for the shutdown of vendors in Asia for the Lunar New Year.

Accounts payable was up $53.4 million, which was 52 days, a decrease of 3 days from 55 days in the prior quarter, and up 2 days from 50 days in the prior year. Overall, cash conversion cycle days was 88 days, which is 8 days lower than the prior quarter. We continue to guide that cash conversion days and the ratio above should be viewed on an annual basis, since there is a seasonality to our business which affects these ratios quarter-to-quarter.

Now, for a few comments on our outlook. As we enter 2017, we see growth opportunities from both a more optimistic economic outlook, as well as a multi-faceted technology refresh cycle. Both of these, coupled with the investments we have made during the past year, put us in a great position to re-accelerate our growth in the many market verticals we serve, and leverage the investments we have made. Therefore, the Company currently expects net sales for the quarter ending March 31, 2017 in a range of $570 million to $630 million. Assuming this revenue range, the Company expects non-GAAP earnings per fully-diluted share of approximately $0.34 to $0.42 for the quarter. At the midpoint, this would represent an increase of 13% in revenues and 6% in EPS from the prior year.

These [targets] reflect our strategy to take advantage of the opportunities we have, to take market share and keep control of our operating costs.

In July 2016, the Company 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 [primarily] market prices. As of December 31, 2016, we have purchased 888,097 shares of 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. Although we are pleased to beat expectations and deliver a record-high quarter, we are mostly excited to focus in on pace to return to the strong growth trend that had been our legacy. With our robust global operation and [service] foundations and industry-based server storage product portfolio, Super Micro is well-positioned and ready to set a new standard for our industry, and to achieve great things.

Operator, at this time we are ready for questions.

(Operator instructions) We'll go first to Aaron Rakers with Stifel.

Okay great, this is Joe Quatrochi on for Aaron. Congrats on the quarter. Just a couple questions if I could -- first, I want to go back to, you guys talked about you're seeing the impact from memory pricing and SSD pricing. Did you, by chance, I mean -- can you give us any color there? Did you sign an agreement with a supplier like you did similar to your hard disk drive back when they had the Thailand flood? And then just kind of coupled with that, how should we think about gross margin? Because you know, in the past, we've seen gross margin decline sequentially into the March quarter, so I mean, is this -- should we expect a similar trend this quarter? And I have a follow-up.

Yes, Joe, this is Howard. Again, as Charles mentioned, we did see some pricing increases, up to about 40%, plus in some of the pricing between let's say September and December. But, we have taken measures to invest in our inventory. As you noticed, we talked about a $100 million increase in inventory, and much of that inventory is being invested in componentry to put us in a good position with regards to the shortages that may exist, or tightness that may exist in the market.

Most important is, we had continued to improve our relationship with key vendors. So, as of today, our relationship partnerships have been much stronger than before, ever. So, that's why we are able to [get a] relatively more consistent price.

Okay, and then just on the cloud business, it's down year-over-year, I understand it's a tough compare. You had a 15% customer last year. But, even if you strip that out, it's I think still down year-over-year. I'm just wondering if you could give any color, what type of demand trends you're seeing there?

Indeed, yes, we did not have a really huge IDC customer, Internet Data Center customer. But, we begin both of the Fortune 500 private cloud customers, and [we get], I would have to say, much more than before ever. And this trend will continue. So, this indeed make our business become more stable in long term for both revenue and profitability.

We'll go next to [Mati Hosani] with SIG.

Thanks for taking my question. On the data center trend, it was interesting to see more than 30% sequential growth, but you didn't have a 10%-plus customer. Can you elaborate on the diversification of your customer? Are these some of the wins from six, nine months ago, that is now materializing? Any color here would be great to better understand the dynamics behind this revenue.

Yes, as I just mentioned, in last quarter's indeed we won a lot of, I would have to say Fortune 500 private cloud customers. And their demand has been consistent and because stable of them -- that's why it's more stable. And we believe this trend will continue.

So, you have -- you now have more than one significant data center customer and they're ramping, and is there any opportunity to continue increasing the mix of these customers, or now you have multiple customers and they're going to continue to ramp?

Both. I believe we will continue to have a more of a Fortune 500 private cloud customer. This area, I believe, healthy for us. And at the same time when our capacity allow, yes, we are also open to grow relationship with [TON] internet data center as well. So, kind of [rather] cheaper this option.

Sure, and one rather technical question for you, Charles. With NVMe adoption increasing, do you see a trend with NVMe on fabric? And if that is happening, how is it going to impact your All-Flash Array product solution?

Indeed, a lot of our NVMe solution are already fabric-based. It's kind of based on a PCI switch, [being] in our chassis. So, indeed the last quarter we have some big deals because of those technology, and indeed we are exactly the leader in the market today. And we saw more and more customer like PCI-based NVMe solutions.

Would that cause a risk of marginalizing your All-Flash Array customers, or products?

Basically, that will improve our [product] margin a lot. However, last quarter, the flash price also [rise] a lot. So, it's kind of partially offset by that.

Right, but I'm just wondering --

But you are not --

- I'm just wondering if there's any cannibalization of some of the other customers, that are just more of an All-Flash Array solution?

Yes, we saw more and more customers like that.

Okay, thank you.

Thank you.

And we'll go next to Mark Kelleher with DA Davidson.

Great, thanks for taking the question. Nice quarter, guys. Just wanted to go back to the component shortages. You mentioned that perhaps you weren't able to pass along the price increases for that. Will you be able to? Will you be able to work your prices up to incorporate that, that's the first question. And the second question is, can you just explain a little bit more about how building the inventory helps with the -- with that issue? Did you get pricing discounts for buying? Just curious.

Yes, Mike, this is Howard. With regards to the passing on pricing to our customers, we are obviously -- last quarter, we saw the price increasing quite fast probably in the middle of the quarter. And so, you know, some of the contracts, POs, were already set. Now that we see this out there, we are working with our customers obviously to pass on the differentials with them. So, we're actively working on that.

With regards to the inventory, how does that benefit us? Again, as you see the prices going up, to some extent we are -- we procured inventory, already made the investment into our inventory, so that as prices go up we do have inventory that we procured at a lower cost to the relative [current] prices.

So you're anticipating pricing to continue?

Especially because we see some significant order is kind of coming continuously. That's another reason why we keep a higher inventory.

Okay. So, could we assume that the shortfall, or the surprise, this quarter, will lead to higher gross margins sequentially? Is that a safe assumption?

It's hard to say, because we don't know what way the price really change during the quarter.

Right. We bought some of the inventory, Mark, but then again, if it keeps on going per se, we have to keep on buying inventory and there's still shortages and things of that nature out there.

Okay. And then just a second question. You know, your subassemblies and systems did very well. Could you just kind of explain the dynamic between that and servers? I know servers had been growing at a pretty good clip, and it seems we're having some success back with the subassembly side. What's your thought on that split?

I think it went with -- with some of the distributors you saw me mention the percentages with regards to the distributor percentage growing in that [purse]. So, some of the distributors were coming to us, quite frankly, with regards to our products. And then obviously from last year, again, the decrease in our internet data center clouds which primarily server systems affected the mix, or the percentages between subsystems and assembly, and complete solutions. So again, part of that is driving some of the percentages.

Okay, great. Thanks.

We'll go next to Rich Kugele with Needham & Company.

Thank you, good afternoon. Just a few questions. First, just revisiting the gross margin, if you've got I believe you said about 10 basis points hit from the utilization, and then how -- is there any way to quantify the breakdown between pricing versus the component shortages?

Sure, [Mark]. I think if you look at the sequential decrease, which was about 80 basis points, probably that's more akin. If you take a look at that I think you'll see that we had a 30 basis points improvement with regard to our utilization, and quite frankly, the only other mention in my commentary was the component pricing, per se. So, if you take a look at all the other factors, you probably see a plus on our basis point impact from the component pricing.

Okay, all right, that makes sense. And then, Skylake does come out we believe mid-year, and so does your guidance include whatever type of air pocket there might be ahead of that arrival?

Yes. Skylake will be a big thing to us. However, the early [seeding] it did well start from March. So, I believe will be not much impact for this quarter. But, as to official release from Intel I believe it's still about early Q3. So, the really big impact will be Q3 this year, September quarter, and early [to premium] for March, [can be sphere limited].

Okay, great. Well done on the quarter, thanks.

(Operator instructions) We'll go next to Alex Kurtz with Pacific Crest Securities.

Yes, thanks guys, and congrats Charles, and the organization, on a good quarter here. Just want to clarify, Charles, the Skylake comments. So, it sounds like you'll have some early availability to certain customers in the March quarter for Skylake? Or, the ability to get some initial pricing and benchmarks out to customers in March?

Yes, we start [seeding] send sample indeed, start from last March, and January, February, we will send much more sample. But really start [seeding] early deployment won't be, start until March. So, how much we can work with our vendor and our customer, [to be able to keep] I don't know. Should be --

There's a possibility you could recognize some Skylake revenue in Q2 then?

Q1, a little bit in Q1, more in Q2 I believe.

And then Q2 is, sorry, Q3 is when -- so the September quarter is when the real ramp would occur?

Yes.

Okay. Then Howard, on the tax rate I just want to make sure I got this right. 25% non-GAAP for March?

That's correct.

You know, that's obviously a big step down here, so should we be modeling 25% going forward, or it should be normalizing around back to 30% in the June quarter, plus?

No, this is -- the 25% includes a release from a self tax audit that we completed. So again, that one would come out, but I think if you take it down to around the 30% or 32%, that shows the improvements that we're making.

Okay, so 31% is the more normalized level?

Yeah.

Okay, and Howard, I think I missed the number of units you shipped for -- in ASPs for the subsystems, and the units for the components. Can you just repeat that again?

Yes. I'll remind you, we changed to nodes, so for the quarter we shipped 145,000 nodes in the December quarter. That compares to 122,000 nodes in the prior quarter, and 133,000 nodes in the prior year. The ASP per node was $3,100 in the quarter, and in the December quarter, $2,900 in the prior quarter, and then $3,400 in the same quarter last year. And then, I'm sorry, you asked for the subsystem assembly?

Yes.

Okay, that was 1,214,000 subsystems and accessories during the December quarter.

1.214?

Yes.

Okay. All right. And the emerging, the emerging storage grouping, you said I think was that plus, was that plus 55% for that specific group of customers?

Yes.

Okay. And then last question, the success in Asia, was that specific to one of these big internet data center customers, or was that just generally the X86 market in Asia this quarter?

I would like to say this spread to several customer.

Okay. And sort of larger data center-type customers, Charles?

Indeed, a pretty wide combination.

Okay. All right, thank you.

Thank you.

And we'll go next to Brian Alger, with Roth Capital Partners. Mr. Alger, please check your mute function, your line is open.

Sorry about that guys, hopefully you can hear me now. Congrats on the quarter. I want to dig in a little bit on the subsystems. Obviously, it was good in the quarter, but it's showing growth again and it's two quarters in a row where we've been up year-on-year after pretty steady, pretty substantial declines throughout all of Fiscal 2016. Is there a specific growth driver here, is it tied to the growth that you're seeing embedded in the Internet of Things side of things? Or, is there more behind it than just catch up in the channel?

I guess the major reason is because we just finished our global operations [there]. I mean, in last fourth quarter, we mentioned we spent a lot of effort to beef up global operations, and that's including SAP implementation and global warehouse, (inaudible) warehouse. So now, all of those have been ready, and global, on-site service [see some also] pretty ready now. That's how we are able to focus on (technical difficulty) and how to grow. And then, we see coming soon Skylake, and also happening new product line, NVMe. We believe, we do believe the future will be -- come back to strong growth again.

So, we should be thinking of the subsystems segment as one of the many growth drivers that are running through the system right now, and not being a drag on growth?

I guess the growth will be overall. Especially NVMe and Skylake, including our coming soon Big Twin.

Right. Following up on that, the IoT-embedded slide, obviously that's now become effectively 10% of the revenue mix, and it's growing at a pretty good clip. That market, obviously, is pretty fragmented and pretty diverse. Is that a growth rate that you know, we should be trend-lining at this point, or is that just too early days to really get a handle on the forecasting?

I believe it's really started. I mean, our focus on IoT has been very consistent. The growth should be continue strong.

Okay, great. And just some housekeeping, Howard, if you can help us out -- you rambled off a whole bunch of growth rates for different segments like HPC and what not. Can you -- do you mind going back to that part of the prepared remarks and just hit those again?

Sure. It was -- in the sequential, or in the year-over-year?

Year-over-year is fine.

Year-over-year?

Whatever's easiest, yes.

Okay. In terms of verticals, we saw growth in next-gen storage, enterprise, and HPC, right, of 55.6%, 220.7%, and 122.3% respectively, offset by a decline in internet data center cloud of 52.6%. That's the year-over-years.

Great, that's what I was looking for. Thank you.

Okay.

We'll go next to Nehal Chokshi with Maxim Group.

Thank you. I've got two topics I want to talk about. One is that -- you're increasing the number of sizeable customer engagements. Is that -- it sounds like that's a mix between hyperscale and large enterprise customers. Is that a characterization, there?

Indeed, the private cloud customer, and based on micro cloud -- I mean, our MicroBlade product, and some are the Twin, [2U] Twin Pro especially.

Okay, and how big of a driver is IBM's Open Power Architecture to the large enterprise customer as well as a hyperscale, the increasing number of hyperscale customers that you're seeing?

Which product are you doing? Open Power?

Yes, so, I think a couple months ago there was a press release about IBM's Open Power architecture winning a key customer, and also highlighting Super Micro as a key supplier within that supply chain. So, the question is, is that a big driver in the increasing number of sizeable customer engagements that you're seeing?

We have some customers like that (inaudible) but at this moment, I will say still too early to say.

Okay, and specifically within the private cloud customer traction that you're getting, it sounds like you're starting to really break through, here. Are you seeing good traction across all geos, or is it specific to say Asia or specific to the United States?

Indeed, across the world. Start from USA, and East Coast, West Coast, we do see a lot of demand. And primarily because of our on-site service, our (inaudible) product line, is [greatly for that second now].

Got it, okay. My second topic is visibility. Your guidance ranges, again, a little bit more narrow than the prior quarter, and two quarters ago it was very wide. So, I take that as an implication of increasing visibility. Is that a correct characterization, there?

I think that's fair, Nehal. I think like I say, we're coming into the quarter, we're on the edge of a technology refresh cycle, we see a lot of great opportunities and as Charles has already talked to you about some of the new customers, engagements that we've got going on, those seem to be very good for us.

Okay. Is that improved visibility also partially, potentially a result of a different way that you're doing your forecasting, and thus it seems that you have a little bit more consistency in being able to hit your targets over the past few quarters?

Well yes, if we go back historically, you know, we went through a lot of investments last year with regard to SAP and our [bonded warehouse] and our reorganization. Those investments have been made, and have been into the system for now over a year, or a year-and-a-half. So, some of those things have helped us improve our overall efficiency, let's put it that way.

Great, thank you very much.

It appears there are no further questions at this time. Mr. Liang, I'd like to turn the conference back to you for any additional or 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.

This does conclude today's conference. We thank you for your participation. You may now disconnect.