超微電腦 (SMCI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro computer third quarter conference call. All participants are in listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that today's conference is being recorded and would now like to turn the conference over to Mr. Howard Kalt of Supermicro Computer, incorporated.

Thank you, Rufus. Good afternoon and thank you for attending Supermicro Computer's conference call on financial results for the third fiscal quarter. With us are Charles Liang, chairman and chief executive officer, and Howard Hideshima, chief financial officer. By now you should have received a copy of today's news release that was distributed at the close of regular trading.

A copy of it may be accessed either on the company's website, www.supermicro.com, or by calling 415-397-2686, and a copy will be faxed to you. Before we begin please note during the course of this conference call management will be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements may involve judgments based on information that is available now but is highly likely to change over time. The company will not necessarily inform you if and when those judgments and the underlying information change.

Company policy is to provide material information only in news releases, widely available conference calls or filings with the SEC. Additional information concerning factors that could cause actual results to differ materially from those in today's forward-looking statements are contained in the company's SEC filings as well as in today's news release. I would add that the company operates under the requirements of Regulation FD, as a result Supermicro Computer provided advanced notification of this conference call by way of news release issued on April 30, 2007.

Like most companies, today we will be taking questions only from securities analysts and institutional portfolio managers but the complete call is open to all interested parties on a listen-only basis. The company will continue to talk with investors individually and in small groups but those discussions will be limited to historical and nonmaterial aspects of the business. If you're interested in such a meeting please contact me at 415-692-3059 or via e-mail on the company Investor Relations page on the website. I will now turn the call over to Charles Liang, chairman and chief executive officer. Charles.

Thank you, Howard, and good afternoon, everyone. My name is Charles Liang, and I'm the president and CEO. Let me start by saying welcome to our first earnings conference call as a public company. As most of you know, on March 29, we accomplished an important milestone in our company's 13-year history by completing our initial public offering.

We appreciate the interest that has been shown in Supermicro, and we welcome our new shareholders. Turning to our financials, I am pleased with our third quarter results. Our financial highlights for the quarter included revenue growth of 39% year-over-year, or 29.8 million to 105.7 million. Net income grew 14% year-over-year, or $0.5 million to 4.1 million.

We are continuing to expand our server barebones, which grew 48% year-over-year, or 12.6 million to 38.8 million. This has been driven by our customers increasing demand for application optimized servers. From a product perspective, I am excited by our continuing introduction of new products, such as our Universal Input/Output server architectures, or UIO product line. This includes four server modes and three server chassis designs. LSI 1068 SAS Card and Intel, Sun Rise Lake SAS RAID 5 card 4-port Gigabit LAN card.

Our LSI 1078 UIO RAID 5 card and Infiniband card also are scheduled to be available in May and June of this year respectively. Moreover, our first 10-gigabit UIO module should be ready in Q1 of fiscal year 2008. UIO technology allows our customers more flexibility for system performance optimization, while increased system I/O bandwidth in many cases. We also received a server innovation award from Intel for our 1U twin super server designs.

Our 6015P super servers effectively double the computing density of traditional server 1U available in the market today while reducing system hardware costs, power consumption, and space requirements. These products again exemplify our commitment to help our partner with the server technology and providing them with optimized configuration for a wide range of application requirements. With exceptional scalable fittings. We expected to see (inaudible) in the following three areas.

First, continued expansion of our already broad product line, including our SuperBlade, blade server, that will go into production this quarter. Second, additional working capital and enhanced credibility provided by the IPO. And third, continue to grow the diversity of our customers and markets that we serve. Let me now turn it over to our CFO, Howard, who will discuss the financial results and forecast.

Thank you, Charles, and good afternoon, everyone. First let me point out that our earnings gross margin, operating expenses and similar items are sometimes expressed on a non-GAAP basis, which reflects adjustments to exclude stock compensation expenses. A reconciliation of GAAP to non-GAAP is included in the financial statements of the company in today's earnings release. Let me begin with a review of the income statement. Revenue of 105.7 million for the quarter was up 39% on a year-to-year basis.

This growth was led by an increase in server systems business which increased 48% year-over-year, or 12.6 million, to 38.8 million. Unit volume of server systems increased 17.2% year-over-year from 29,000 to 34,000 units. ASPs also increased on a year-to-year basis from approximately $900 per unit to $1100. This is primarily due to higher sales of our series 6000 servers and AMD series of servers offset in part by declines in ASP of more mature products. None of our customers made up of more than 10% of our net sales in the third quarter with distributors and resellers comprising 73% of revenues for the quarter.

These distributors and resellers service a variety of different markets and customers. We continue to have a good distribution of geographical sales as well with less than 60% coming from the U.S. On a sequential basis, net revenues were down by 7.9 million from 113.6 million in Q2. In Q2 the company made a strategic decision to provide complete server systems to two customers, which included hard disk drives and memory, which we do not provide. As a result the company had a higher than expected revenue but lower gross margin in Q2. In Q3 we continued to sell to these customers but have asked them to procure hard disk drives and memory directly. Non-GAAP gross profit was 18.2 million for the quarter up 23% from 14.6, 14.8 million in the same quarter last year.

Non-GAAP gross margin was 17.2% of revenue down from 19.5% a year ago. The non-GAAP gross margin decline from a year ago was due to higher gross margin on new processor introductions such as the Woodcrest and Dempsey which occurred in Q3 of last year. On a sequential basis, non-GAAP gross margins however, increased from 16.8% in Q2, to 17.2% in Q3, due to the company selling fewer commodity components such as the hard drive and memory. Non-GAAP operating expenses totaled 11.3 million for the third quarter, or 10.7% of revenue. Down on a percentage basis from 11.5% a year ago.

The year-over-year absolute dollar increase was primarily due to increased litigation expense and additional engineering, sales, marketing, and administration headcount to support the growth of the company. Non-GAAP operating profit was 6.8 million, or 6.5% of revenue, up from 6.1 million or 8% of revenue a year ago. Non-GAAP net income was 4.5 million, or 4.3% of revenue, which is up on an absolute dollar basis from 3.8 million a year ago and down on a percentage basis from 5.1% a year ago.

The tax rate in the third quarter on a non-GAAP basis was 31% compared to 35% a year ago. The reduction in our tax rate was due to an increase in our benefit from R&D credit and foreign income tax credits to taxable income. Non-GAAP fully diluted EPS was $0.14 per share compared to $0.12 per share a year ago. Fully diluted shares used were 32.4 million compared to 32 million a year ago. Turning to the balance sheet on a sequential basis, accounts receivable increased by 1.6 million to 32.8 million.

DSOs increased by five days to 28 days from Q2 as we reduced the dollar volume of payment terms as a percent of sales during the quarter. Inventory decreased by 1.7 million to 73 million with days of inventory increasing by five days to 78 days. The increase in days was due to higher revenues during Q2 and are continuing to build inventories for Q4. Inventory reserves were 6.8 million compared to 5.6 million in Q2. The increase in inventory reserves was primarily related to our DDR-1 inventory.

Accounts payable decreased by 10.2 million to 66.2 million with the days payable outstanding increasing by four days to 75 days. The increase in days was primarily due to higher margins in Q3, which led to lower cost of goods sold per day which is used in the denominator for determining days payable outstanding. Accrued liabilities increased by 3.4 million to 14.2 million primarily due to a $2 million increase in customer prepayments for orders to be shipped in Q4.

Cash and cash equivalents and short-term investments were 20.8 million, down by 900,000 from 21.7 million in the prior quarter. The decrease is primarily due to reduction in accounts payable offset in part by net income and an increase in AR. Please note that since the offering was completed on April 3rd, 2007, 6.4 million of primary shares sold in the the offering will be outstanding for the entire fourth quarter. In addition, net proceeds of approximately 43.6 million should be added to our cash balances starting on April 3rd.

I am pleased to report that on May 1st the company and Rackable entered into a confidential settlement agreement. That settlement will have no financial impact on the company. We will continue to sell our full range of products but other details of the agreement will remain confidential. The company has made a policy decision to disclose revenues for the quarter.

Now for a few comments on our outlook. We have historically seen sequential revenue growth in Q4 of our fiscal year. We believe this should continue this year driven by new products introduced during the third quarter and other product introductions scheduled for the fourth quarter. We estimate fourth quarter fiscal year 2007 revenues to be in the range of 106 to 111 million. With that, let me turn it back to Charles for some closing remarks.

While I was pleased with the quarter from a financial and business perspective, Supermicro needs to continue its strategy of innovation and be first to market with the latest in technology to offer the most optimized solutions to our customers.

Moreover, keeping our focus on controlling our costs to allow us to continue to deliver strong financial results, we look forward to the continued support of our employee both shareholders old and new, vendors, and customers, to help us continue our success at Supermicro. Thank you all for joining us on our first earning conference call. With that, we will open the call to questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And for our first question we go to Richard Farmer with Merrill Lynch.

Thank you. Charles and Howard, like to first ask, if I could, about a little bit of elaboration on some of the factors that influenced your gross margins.

I heard the comments on the lower margins of the mature products that were offset partly by the higher mix of servers versus components. It sounds like also, and this is where I'm asking for a little more clarity this inventory write-down on DDR 1 or at least increased reserves, sounds like you didn't need to sell as much disks and memory to some of your Internet customers. Can you help us quantify how big those relative factors are in the contribution to your gross margins in the quarter, please?

Sure, Richard. Our server percent of sales of revenue grew to about 37% this quarter compared to last quarter, which was about 35 a year ago about 35%. So that, again, there's a higher margin on server solution products versus our standard components product.

So that entered into the margin positively. With regards to the inventory reserve, the 1.6 million that I noted there was about a percent, 0.6 of additional expense to our cost of goods sold line.

Okay. And should we just to sort of clarify on the inventory reserve, you believe that's quite transitory in nature, so that we wouldn't expect that to continue in future quarters? Or do you expect that that level of increase to the reserves is going to be fairly typical going forward?

And then also on the other part of the question around the disk and memory that you sounds like you sold less of these to the internet customers. Can you clarify, are you selling any now to those customers, or did you in the March quarter, or is that sort of completely out of the mix in terms of the impact on your gross margin?

No, we continue to sell some hard disk drives and memories to select customers that require hard disk drives and memories. However, with some of the other customers that we talked about for last quarter, we have asked them to procure them directly.

With regards to your question on the inventory reserve, this is the percent write-down that we had is on a nine-month basis, we had about 9%, 0.9%, excuse me, of provisions for inventory reserves during the nine-month period. That's comparable to 1.2% during the nine-month period a year ago. It's fairly consistent with our historical trend.

Okay, thanks. And just one more follow-up, if I could, and I'll let others go in the queue. I understand it's tricky to measure this but is there any way you can help us understand what effect, if any, there was on your gross margins from any changes in terms with Ablecom in the quarter?

Sure, Richard. We have, in our S-1 documents, we've disclosed and our Q to come, we've disclosed that we purchased about 27% of our cost of goods sold, 27 to 28%, excuse me, of our cost of goods sold from Ablecom, and the gross margin, the effect of price increases or decreases to our gross margin is about less than 0.2 of a percent.

Okay, so not a very significant change or influence in your gross margins from changes in, I guess, prices at Ablecom. I guess the other tricky part of that is how much of those price changes would be sort of naturally occurring in the market regardless of suppliers versus specific to Ablecom.

I know that's tricky to mention but do you have any thoughts on how that might have differed from the market rate of change?

No, I don't have any thoughts on that to expand further. I can tell you, like I said, we are measuring it. Again, we don't see it as a large impact.

And for our next question we go to Glenn Hanus with Needham & Company.

Good afternoon. I think last quarter you mentioned probably two customers, or a couple of large data center customers accounting for about 10% of sales. Could you tell us Howard, what it was this quarter?

Did you have how many data center customers you had and what percent of sales that represented.

We don't disclose it. Again, it's less of a percent. It's down as far as percentage basis, about 3%.

Okay. It was roughly 7% this quarter?

About 3%.

3%?

That's correct.

Okay. Can you tell us how many large recognizable names there were that were in that 3%?

We do not typically disclose names. I can tell that you none of our customers

just the number.

Yes None of our customers make up more than 10% of our net revenues.

I got in that the press release.

sure.

But how all right, I'll just move on. Could you maybe just talk about going forward on the gross margin and operating expenses for the June quarter?

Maybe talk about the puts and takes on the gross margin and whether you think you can continue to achieve some sequential improvements there.

I think we've the company is not giving guidance with regards to our operating or our gross margin numbers. I can tell you that, again, we continue to focus on our gross margin.

So basically we will continue to keep our consistent stable business model.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And for our next question we return to Richard Farmer with Merrill Lynch.

okay, that was quick.

Well, if I could follow up, just to understand a little bit more on your plans to sort of balance the priorities of revenue growth versus margin going forward, I understand you're not giving guidance on gross margin, but when push comes to shove, which is more important to you, or how do you plan to address those priorities?

We will try to keep ahead of CPGs. So market share is important for our long-term business. However, we try to keep ahead the gross margin at the same time. So because we have a very broad product line, and also a very diverse customer base. So at this moment I feel quite comfortable to maintain this stable policy.

Okay. And also, on the competitive pricing environment, and the competitive dynamics generally, can you comment on anything that you saw in the quarter? Was pricing becoming more or less aggressive relative to your expectations or relative to the previous quarter? Any comments on those competitive dynamics with pricing?

This quarter, we did not see much difference from last quarter or last few quarters. So, yes data center some big deal price is very sensitive, we try to be selective.

Once the margin is healthy, we'll be there. If the margin is too low, then we'll be absent. However, again, that's why I just say we have lots of attractive good products, like our UI Twin, our UIO, so I believe we are able to maintain a stable business. Without sacrifice low margin.

Okay. Thank you.

One more, if I could. How did the OEM business do in revenue growth terms relative to the overall business? Did it grow faster or slower than the overall business?

Basically, we keep pretty much same pace like we have it before. Recently we continue to have OEM opportunity, and we approach it kind of (inaudible - highly accented) the percentage, do you have the number?

Richard, the percentage of OEM end customer business was 27% in Q3, as compared to 24.9% in year-to-year basis.

Okay. Do you have that number from the prior quarter, too?

Prior quarter was 34.9%.

Okay. Any expectation on how that will trend going forward?

Should be quite stable, consistent. Last quarter we have more because, as you know, we ship some data center with hard drive and memory, CPU. That's why last quarter we see higher numbers, 34.9.

Okay, that's very helpful. Let me -

I believe we will continue to keep it to high 20% 20 something

okay.

Let me get out of the queue and see if others want to ask questions. Thanks.

Thank you.

And we return to Glenn Hanus with Needham & Company.

Hi. Let me make sure I have kind of the new product rollout agenda right. The 1U Twin and the Blades, when do we expect sort of each of them to start to really come into some meaningful volume to impact revenues?

Yes, we start shipping 1U Twin two, three months ago, and the quantity is mostly growing. So we have a good feeling 1U Twin, will become one of our major products soon. We continue to see the orders for 1U Twin, some are very influential OEM customers.

As to blade server, that design, engineering and testing going on very smoothly and we expect small volume production to happen this quarter, and quantity will start to ramp up more in September quarter. So new product segment going on basically including our UIO, universal I/O, also getting lots of interest from customers.

As to Blade server, that design, engineering and testing going on very smoothly and we expect small volume production to happen this quarter, and quantity will start to ramp up more in September quarter.

UIO start to ramp up about this quarter, kind of June quarter we will see some revenue from our UIO and Q1 '08 fiscal year, for sure we will see more significant number, because brand-new product for this quarter basically.

And on the patent litigation, are there some, in our models that we had going forward, will we be able to trim a little bit on some of the G&A expenses?

Glen, again, we will have some while those expenses will not continue, I do have expenses related to being a public company.

Okay. Thank you.

And we return to Richard Farmer with Merrill Lynch

thank you. Just one more, please. Do you have any update you might be willing to provide on your plans to expand the end-stage customization and assembly and distribution in China?

Indeed surely, IPO indeed, we continue very aggressive in our R&D.

That's why great server product has been going on very smooth, and as to production in China, in Asia, we are aggressively study that location expense, and within a few quarters we should have action there. Similar model we have European system integration.

Thank you very much.

Thank you.

And this does conclude the question-and-answer session of our conference call, and way like to turn the conference over to Mr. Liang for any closing remarks.

Thank you for joining us today.

We are pleased to be a member of the public marketplace, and we look forward to talking to you again at the end of the next quarter. Thank you, everyone.

And, ladies and gentlemen, this does conclude the Supermicro Computer Incorporated, third quarter 2007 conference call. We do appreciate your participation, and you may disconnect at this time.