超微電腦 (SMCI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. first quarter fiscal 2008 conference call. At this time, all participates are in a 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 your question. I would like to remind everyone that today's conference is being recorded. And now I would like to turn the conference over to Mr. Howard Kalt of Super Micro Computer, Inc. Mr. Kalt, please go ahead, sir.

Thank you, Robbie. Good afternoon and thank you for attending Super Micro Computer's conference call on financial results for the first quarter of fiscal year 2008, which ended September 30, 2007. With us today 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 415-397-2687, and a copy will be faxed to you.

Before we begin, please note that 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 Commission 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 result 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, Super Micro Computer provided advanced notification of this conference call by way of a news release issued on October 22, 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 discusses 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's investor relations page of the website.

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

Thank you, Howard, and good afternoon, everyone. This quarter marks our 14th anniversary since our funding in 1993. It was highlighted by record high in revenue again. Our revenue reach $180 million with a growth of $27.8 million, compared with our fourth quarter of fiscal year 2007, which is about 30.8% growth. This quarter net income reach $5.8 million with a growth of $1 million compared with last quarter, which is about 20% -- a 20% growth. The continued revenue traction of our 1U Twin and Universal I/O solutions, the start of volume shipment of our SuperBlade servers and the launch of our innovative products, such as AMD Barcelona server and Intel quad-core MP Xeon server solutions sets our table for additional goals in our future.

The 1U Twin continues to gain much share with customers in high-performance, high-density, (inaudible) converting and data center environments. The 1U Twin server require half as many server racks, chassis, power supplies and power cables, which should reduce customer's TCO. Additional cost savings associated with this IP space required as well easier maintenance and management (inaudible) servers are very attractive option for almost any high-performance server applications. Our new innovation Universal I/O architecture has also been increasing in revenue during the quarter. Customers appreciated (inaudible), flexibility, cost advantages, and investment protection, which the UIO architecture provides.

Future upgrades can be achieved by replacing the UIO card and/or expansion card instead of replacing entire systems. [Even without any] UIO module or expansion cards, our UIO system functions as an better cost effective server. With the UIO card installed a single UIO server can support a (inaudible), 10-gigabit ethernet or (inaudible). This versatility also minimize the number of different server models that resellers need to keep in inventory. During the quarter we went into volume shipment of our SuperBlade servers, which implement the very latest (inaudible) in server technologies, making them an ideal solution, not just for enterprise applications, but also HPC environment.

Taking module computing to another level, our high-density blade can be optimized for a wider range of applications with exceptional scalability. SuperMicro Blade use 90% (inaudible), high-efficiency, redundant power supply to ensure energy-efficient operation and reliability. During the quarter, we also launched innovative products such as our AMD Barcelona server solution and our line of Intel quad-core MP Xeon servers. Most of these products highlight our ability to deliver a variety of applications [rapidly] to market, utilizing the latest in technology. One of the most innovative products, which we showcased at Intel Developer Forum, was our OfficeBlade server, optimized for office environments and which it is 93% high-efficiency power supply. Our OfficeBlade servers operate at a noise level of less than 50 CP, which is as quiet as a high-end workstation. Now you can have a supercomputer at your desk top.

While this market is more of a niche, it represents an opportunity for additional growth of our SuperBlade platform. [Delivering application optimizers, server solutions, and being first to market have been hallmarks of Super Micro.] The value which we provide to our customers has again been proved by the continuous growth in our revenue and profitability. We have continued to invest in our infrastructure in order to support the market's growing needs. We have recently expanded our engineering employee base, both here in San Jose and in Asia. We have also add more resource to production area in order to meet the demands of our customers. We are continuing to evaluate sites in Asia to expand our manufacturing and warehousing capacity in the near term, in order to reduce most production and logistic cost. All of this is within our plan to grow our technical and operation capability and capacity to build a stronger foundation for our future growth while maintaining our financial discipline and growing our shareholder values.

With that in mind, let me now turn it over to our CFO, Howard Hideshima, who will discuss the financial results and forecast. Thank you.

Thank you, Charles, and good afternoon, everybody. First let me point out that our GAAP numbers appear in the news release and so I will be discussing earnings, gross margins, operating expenses, and similar items on a non-GAAP basis, which reflects adjustments to exclude stock-compensation expenses. Reconciliation of GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release. Let me begin with a review of the first quarter net income statement. Revenues of $117.9 million for the quarter was up 30.8% for the same quarter a year ago. This growth was lead by the increase in our server systems business, which included 43.5% year over year, or $13.8 million to $45.6 million. Unit volumes on server systems increased 26.7% year over year from 30,000 to 38,000 units. ASP for servers also increased on year to year basis, from approximately $1,000 per unit to $1,200 per unit. The increase in server revenue was primarily due to higher sales of our OEM and Series 6000 servers, offset in part by declining AMD-based servers. Our 1U Twin and UIO products, as well as our enterprise Blade products, continued to gain traction during the quarter.

We continue to maintain a diverse revenue base with none of our more than 300 customers making up more than 10% of our net sales in the first quarter, 61.7% coming from the U.S. and 60.9% coming from our distributors and resellers. Internet data center revenue was 8.6% compared to 3.3% in Q1 of fiscal year '07. We started approaching this market about two years ago and have progressed well in developing solutions which serve this market. On a sequential basis net revenues were up by $7 million or 6.3% from $110.9 million in Q4. The increase is primarily due to the increase in sales to our OEM customers and continue growth in sales of the 1U Twin and UIO products, offset in part by lower shipments of AMD products. Internet data center revenue was 8.6% compared to 6% in Q4.

Non-GAAP gross profit was $23.2 million for the quarter, up 28.7% from $18 million in the same quarter last year. Non-GAAP gross margin was 19.6% of revenue, down from 20% a year ago. The non-GAAP gross margin decline from a year ago reflects higher inventory reserves in Q1 of fiscal year '08 of approximately 1%, offset in part by cost reductions in material and freight costs. On a sequential basis non-GAAP gross margins increased from 18.1% in Q4 to 19.6% in Q1 due primarily to cost reductions on existing product, higher gross margins on new products -- such as the 1U Twin and UIO -- and lower inventory reserves. On a year-over-year basis, non-GAAP operating expenses totaled $13.1 million for the first quarter or 11.1% of revenue, up from 10.6% a year ago. The year-over-year absolute dollar increase of $3.6 million was primarily due to additional R&D, SG&A, head count to support the growth of the Company. The Company's head count grew by 170 from 491 in Q1 of fiscal year '07 to 661 at Q1 fiscal year '08; primarily in the areas of production, 207 to 270, and R&D 166 to 236. Overseas head count during this period expanded from 79 to 116.

On a sequential bases non-GAAP operating expenses was up $1.9 million or 16.9%. The increase in operating expenses was primarily due to higher salaries and payroll expenses associated with increased head count and annual salary increases of about $700,000 and NRE expenses related to our Blade (inaudible) development of about $700,000. Non-GAAP operating profit for the first quarter was $10.1 million or 8.5% of revenue, up $1.6 million from $8.5 million or 9.4% of revenue a year ago. The increase was primarily due to growth in our revenue, offset in part by higher operating expenses to support the growth of the Company, introduction of new products, and overhead associated with being a public company. Non-GAAP operating profit on a sequential basis was up $1.2 million or 13.4% from $8.9 million or 8% of revenue in Q4, primarily related to the higher revenues and gross margins discussed above. On a year-over-year basis non-GAAP net income for the first quarter was $6.6 million or 5.6% of revenue, which is up from $5.1 million or 5.7% of revenue a year ago. On a sequential basis, non-GAAP net income was up $0.5 million or 8.1% from $6.1 million in Q4.

The tax rate for the first quarter on a non-GAAP base was 36.6%, compared to 37.7% a year ago. The decrease in our tax rate was due to increase in our benefits from R&D credits. Our non-GAAP fully diluted EPS for the first quarter was $0.17 per share, compared to $0.16 per share a year ago. Fully-diluted shares used were 38.9 million compared to 32.4 million a year ago. The fully-diluted shares increased by 6.5 million primarily due to the 6.4 million shares offered in the Company's IPO, which closed on April 2, 2007. On a sequential basis, our non-GAAP fully-diluted EPS increased by $0.01per share from $0.16 in the fourth quarter.

Turning to the balance sheet on a sequential basis, cash and cash equivalents and short-term investments were $69.4 million, up $3.5 million from $65.9 million in the prior quarter. The increase is primarily due to positive cash flow from operating activities of $4 million in the quarter. Accounts receivable increased by $7.2 million to $40.7 million, DSOs increased by two days to 29 days from Q4, as the Company worked to reduce the discount its customers receive from TT and COD payment terms. Inventories increases by $6.7 million to $73.4 million, with the days in inventory decreasing by three days to 68. The decrease in days was due to higher revenues during Q1. Inventory reserves were $10.9 million, compared to $8.9 million in Q4.

Accounts payable decreased by $8.7 million to $70.1 million, with the days payable outstanding decreasing by one day to 64. The decrease in days is primarily due to the company working with our vendors to gain cost reduction and paying on better terms. Land and building was $27 million, representing approximately 262,000 square foot of property in San Jose, California at the end of Q1. As previously indicated in a press release and 8-K filing, the Company closed escrow on a building located in San Jose near its -- close to its San Jose facility on October 16, 2007. The building is approximately 90,000 square feet and cost approximately $11.3 million. Historically we have allocated about 70% of the value to land and 30% to building, which is to depreciate over 39 years.

Now for a few comments on our outlook. We have historically seen seasonal revenue growth in our fiscal Q2 and Q4. We have also seen a historical pattern of increased revenue traction following the introduction of new products. We believe that this should continue this quarter, New products introduced during the prior to quarters should provide additional revenue during Q2. As a result, we estimate second quarter fiscal year 2008 revenues to be in the range of $128 million to $135 million. Let me also say that Charles and I will be the UBS Technology Conference on November 15th in New York, presenting at 11:45 a.m. local time. We hope to see you there and we also continue to meet with portfolio managers and security analysts, both on the road and our offices. If you are interested in such a meeting, please contact Howard Kalt at 415-692-3059.

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

Thank you, Howard. I would like to say the we started the fiscal year 2008 with solid first quarter in which we saw sequential revenue, margin, and net income goals. We continue to work on strengthening our operation in the U.S. and abroad and looking forward to and exciting year filled with additional innovative products resulting in continued growth in revenue, profitability, and shareholder value. We begin our 15 years of operation expecting to continue our 14-year tradition of profitability. Thank you all for joining us on our earnings conference call. With that, we will open the call to questions. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we'll go first to Glenn Hanus with Needham.

Good afternoon. Could you talk -- your gross margin performance exceeded my model. Could you talk about the relative contribution of the [items you mentioned in your script on the upside there? And the -- how you are feeling about the sustainable of gross margins at current levels now going forward?

Okay. Very good. Basically because our 1U Twin have been growing very well, indeed a bit better than what we thought, and Universal I/O, UIO product also growing strongly. Together we started to ship SuperBlade, we started shipping in production. So all of those contributed to our better gross margin. Again, because of new technology, better technology. So it's very important for Super Micro to continue to keep innovative products and we have a good feeling for those. However, yes, according to the market, sometime for strategic reason, we may not gain new market segment or new customer, so in those cases we may have to be aggressive in price to gain new customer. So basically we like to control our growth and for sure, control our gross margin.

And anything on the outlook there? Gross margins? Do you think you can hold them here above 19?

It -- we have options, you know? Basically we try to keep a (inaudible) number for companies long term business, and that's good for shareholders long-term future. So from 18 to 19 (inaudible), something it's all possible.

It's -- I can't quite understand that -- it's possible -- what?

It's possible to keep it between 18 or 19 (inaudible).

Okay.

That's (inaudible) for companies long-term future.

Okay. That's my question, then. I guess I'll let you move on and circle back. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go next to Josh Sloan with Glacier Bay Capital.

Hey, guys, how's it going? Just had a question on the operating expense line. I do think it increased sequentially a little bit more than maybe I was expecting, and I'm curious if you can sustain at that level or if we should continue to model growth in there?

Hey, Josh, yes, we -- as I mentioned earlier we had about a $700,000 charge for NRE expenses in our R&D area, and we do -- that was a culmination of probably about three years -- over two years of development work in our Blade server solution business. So again that was a culmination of that project. Obviously we'll have other projects going forward, but that was a major endeavor of the Company and we're happy that we went into volume production in that area.

Is the implication of that that absolute dollar of OpEx could be down next quarter?

Again, we won't see that particular expense incurring, but there may be other NRE or other charges. But again, that was -- the $700,000 was for the culmination of about a project that lasted over two years.

I would say even if I take that out maybe it was up sequentially more I thought. I mean, just --

The other reason, I believe, because we aggressively growing our foundation in R&D and production. So [all of those], including the hire more people, retrain our people those allow for long-term Company growth. And I believe it's a very good idea to invest at this moment when Company is strongly growing.

That's fair. And on the gross margin line, I think everyone on the call -- or everyone who follows you sees you guys growing the business 30% a year, at least. You're doing some interesting thing in Asia as far as assembly there and then a lot of other things to increase gross margin. And getting back to the last question, I guess, is your -- and I know there's new products and there are good years and bad years with new products, but is your gross margin sustainably higher because of scale and because of all of these other things that you're doing than it was a year ago or two years ago, on a like-for-like basis, assuming new products or not new products?

Yes, Josh, I think we talked quite a bit about building economic scale being -- being one of our primary short-term goals, and I believe the Company through its revenue performance has continued to build scale. So we're obviously in better position today as we were in a number of years ago. And we'll continue to look at, again, improving and strengthening our position.

Last question. Could you just give me the absolute dollar on the inventory write-down number?

About $2 million.

About $2 million? Okay.

Yes.

Which again -- compares to -- last quarter it was about $2.7 million. Is that higher than it should be?

It's -- it's what we believe. Obviously we look every quarter at the end of every quarter and make our estimates to put a -- what we believe is an adequate reserve.

No, I was just saying going forward maybe. Is there a way we should think about it maybe as a percent of sales or something like that?

Again, last year we had about 1.3% of our -- for fiscal year '07 was our inventory provision. Again, this quarter it ran a little higher, and again, we'll look at it every quarter.

In the long term we hope we can continually improve, though, because in the past couple of quarter, as you people know, (inaudible) and those have been issued to lot company and looking forward to next few quarter, I believe we -- we have room to improve.

Well, I mean, I guess all of this really bodes well for gross margins going forward, I imagine. Thanks a lot guys, appreciate it.

Thank you.

Thank you. We'll go next to [Wamzy Mullen] with Merrill Lynch.

Hey, Howard and Charles. Question I had was also pertaining to gross margin. You guys mentioned a higher gross margin from new products, cost reduction and also lower inventory reserves. If you rank ordered those, Charles, should I take you comment that new products were the primary driver of the higher gross margin?

Pretty much new products, especially with 1U Twin and UIO.

Okay. And from a component cost perspective, how much was -- how much was the impact in gross margins? Was that --

Yes, Wamzy, on a -- higher gross margins and cost reductions we had about 1.5% made up by that.

Okay. Thanks. And can you talk about the impact from Ablecom on your gross margins?

Sure, happy to. It was minimal. It resulted in about eight basis point increase to our gross profit in Q1, and there are -- purchases represented about 23%, 23.7% of total cost of goods sold, which is down from prior quarters and prior year.

Thanks, Howard. And can you comment on what your -- how you're thinking about balancing between revenue growth and margins? In this quarter, did you make a conscience decision to walk away from some of the lower-margin businesses? It looks like your internet data center customer percent actually went up, so can you elaborate on that a little bit?

Indeed, you are right. [I mean, and that's a case we have a choice to upgrade you in some competitive deal or not,] so looking forward, again, we had to keep the Company able to grow more than 30% year after year. That pretty much our bottom line. And once above this bottom line, we try to have a dynamic choice to (inaudible) basically our company and for our shareholder.

Thanks, Charles. One more, if I could. How large of an impact were Blades on revenue growth in this quarter and how should we think about it next quarter? Obviously, HPC class is doing really well. IBM's not doing as well in that particular segment. Are you seeing -- relatively speaking what particular verticals or what particular areas are you seeing opportunities in the Blade product? Thanks.

Yes, very good. Basically we spend almost three years to develop our (inaudible) product line. Finally we are very happy, it's ready for production. However, revenue won't be (inaudible) because [in our new portal] we try to be conservative, so (inaudible) some customer, although we shipping in some volume, but we try to control the growth. Because overall 30 something percent,, again is our bottom line growth rate, and in the near future we are feel very exciting for this strong product line. We have enterprise Blade server and then coming soon OfficeBlade. Like I just mentioned, our OfficeBlade perform at about 50 TP noise level, which is like a high-end workstation. So very suitable for office environment. Before people don't believe Blade is good for office environment. Now we make that product -- that possibility available. So again, in next couple of quarter and near future, we feel very excited for this strong product line.

Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And next we'll take a follow up from Glenn Hanus with Needham.

Can you talk, Howard, a little bit more about the -- you mentioned the discounts and that you're getting better terms are suppliers and with your -- with your customers and your suppliers. Can you give us some quantification or some way to think about how that's progressing and how much more progress might be available?

Yes, sure, Glenn. With regards to our days, we went to 29 days and previously it'd been in the low 20s and we're working our way up there. It's primarily because we do have a good portion -- the majority of our sales had been in the TT and COD- type of terms, which the Company has the traditionally offered anywhere from a 1.5% to 2% discount for those types of terms. We've been weaning our customers off -- trying to move our customers off to more standard terms, like net 30 and what have you, and that has contributed to the gross margin pickup. As I mentioned the combination of the one -- 1.5% for new product introductions, cost reductions, it's all put in to that bucket.

Okay. Can you maybe talk about how you're feeling about the impact of server virtualization products on your business?

Yes, about -- today about [18%] of our product -- application optimize market, so we see this segment impact from virtualization is much smaller. Yes, we have some general purpose server markets where each year faced to a more challenge to -- with tradition. However, in the more traditional application, people need really high-performance, high-density system, and as you know, we are very good, very strong in this area. For example, our Intel MP system, AMD MP system all are growing quickly. And (inaudible) 1U Twin, lots of people use the 1U Twin for (inaudible) tradition application as well. So when virtualization become more popular, I do feel very optimistic regarding the impact to our business.

Any comments you can make on the competitive landscape you saw in pricing environment through the quarter versus HP, IBM, and DELL?

Yes, that market, in last quarter from what I observe is quite stable. Again, the market continued to be very competitive, but basically not much change in last quarter. And looking forward, I believe our foundation become bigger, stronger. Our market share we're continuing to grow. So the challenge will be continued stronger effort (inaudible)m but looks like we should be in better shape than before.

And more specifically on the enterprise Blade products versus HP and IBM, any commentary you want to make there?

We are new, right, and that's a fact. Now we send a lot of systems for customer to (inaudible) practice our system and order feedback are quite positive. So we have very good confidence that our Blade will be a successful product, especially our Blade server provided some feature that our competitors do not -- cannot beat us. For example, [computing, density,] high-efficiency power supply, and also very [directory]. Our cost advantage is quite good in Blade server.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And it appears at this time we have no further questions. I would like to turn the call back over to Mr. Liang for any additional or closing comments.

Thank you. 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. Have a good day.

Ladies and gentlemen, this concludes the Super Micro Computer, Inc. first quarter 2008 conference call. We do appreciate your participation. You may disconnect at this time.