超微電腦 (SMCI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer, Incorporated Second Quarter Fiscal 2008 Conference Call. (OPERATOR INSTRUCTIONS.) And now, I'd like to turn the conference over to Mr. Howard Kalt of Super Micro Computer, Incorporated. Mr. Kalt, please go ahead, sir.

Thank you, Abe. Good afternoon, and thank you for attending Super Micro Computer's Conference Call on financial results for the second quarter of fiscal year 2008, which ended December 31, 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 on the Company's website, www.supermicro.com.

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 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, Super Micro Computer provided advance notification of this conference call by way of a news release issued on January 17, 2008.

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 not include discussion of any material non-public information. If you are interested in such a meeting, please contact me at 415-692-3059, or via email on the Company's Investor Relations 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 was a record high quarter for us in both revenue and profitability. Our revenue reached a record high of 136.9 million, growing 23 million, or 21%, compared to the same time last year. This quarter, net income reached a record high of 7.7 million, up 2.7 million, or 56%, compared with last year. Our leading edge products, like the high frequency power supply server, UIO, and 1U Twin servers were primary contributors to this increase in revenue and profitability.

We consider Super Micro is the leader in providing energy [efficient] servers to our industry for the past two years. A year ago, we had achieved approximately 85% power efficiency on some of our servers, while the industry average was at about 75 to 80% power efficiency. We have some of our server--sorry--we have continued our drive for innovation and have increased our power efficiency on some of our servers to 93% today, while the industry has moved to 80 to 90% maximum power efficiency. However, our driver for power efficiency servers extends beyond just the power supply. We also optimize for power efficiency at the components level, such as (inaudible), memory subsystem, and chassis.

While each may seem like a relatively small savings in power, together they achieve some significant power savings on a completed server basis. These savings have been embraced by our customers as indicated by the growth in our business. Most of our UIO and 1U Twin servers have increased significantly in revenue in the last 12 months. Customers appreciate a better (inaudible), flexibility, cost advantage, and investment protection, which the UIO provides.

Future upgrades can be achieved by replacing the UIO card and/or expansion card, instead of replacing entire systems. Even without a UIO module or expansion card, our UIO functions as an extremely (inaudible) effective server with UIO features a single UIO server can support many different (inaudible) controllers - 10-gigabit (inaudible) controller or InfiniBand controller. This was the (inaudible) also minimize the number of (inaudible) server models that (inaudible) need to keep in inventory.

The 1U Twin servers require half (inaudible) chassis, power supplies, and power cables, which reduce customer's total cost of ownership, know as TCO. Additional cost savings (inaudible) IT space requires, whereas (inaudible) and Management make this server a very attractive option for almost any high performance server application.

Most of these (inaudible) will continue to be optimized with (inaudible) and design in order to meet the increasing need of our customers. Delivering innovative application, optimizing server solutions, and being [first to the market] have been hallmarks of Super Micro. Our solutions help our customers grow their business, which in turn help our growth, as has been proven by our increase in revenue and profitability.

We will continue to invest in our infrastructure to support the continuing need of our customers (inaudible). We have significantly expanded our engineering and (inaudible) capacity, both here in San Jose, and in Asia. We have also added more production resources to meet the demand of our customers. We are continuing to evaluate the sites in Asia to expand our manufacturing and warehousing capacity in the near future in order to reduce both production and logistical 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 while maintaining our financial discipline and growing our shareholder value.

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

Thank you, Charles, and good afternoon, everyone. First, let me point out that our GAAP numbers appear in the news release, so I will discuss 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.

Let me begin with a review of the second quarter income statement. Revenue of $136.9 million for the quarter was up 20.5% from the same quarter a year ago. The growth was led by the increase in our server systems business, which increased 44.4% year-over-year, or 17.8 million to 58 million. Unit volumes on server systems increased 29.4% year over year from 34,000 units to 44,000 units. [ASPs] for servers also increased on year to year basis, from approximately $1,200 per unit to $1,300 per unit. The increase in server revenue was primarily due to higher sales of our OEM and end customer solutions, utilizing our high efficiency power supplies and sales of new products, such as the UIO and 1U Twin.

We continue to maintain a diverse revenue base with none of our approximately 400 customers making up more than 10% of our net sales in the second quarter. Furthermore, 62.1% of our revenue came from the U.S. and 60.9% from our distributors and retailers.

Internet data center revenue was 12.3% compared to 8.8% in Q2 of fiscal year '07. On a sequential basis, net revenues were up by $19 million, or 16.1%, from 117.9 million in Q1. Again, the increase was primarily due to an increase in the sales of UIO and high efficiency power products. Internet data center revenue was 12.3% compared to 8.6% in Q1 of fiscal year '08.

Non-GAAP gross profit was 27.4 million from the quarter--for the quarter, up 43.4% from 19.1 million in the same quarter last year. Non-GAAP gross margin was 20% of revenue, up from 16.8% a year ago. The non-GAAP gross margin increase from a year ago reflects three factors. First, higher revenue mix from computer server solutions. Second, improvement in our cost of standard components, such as memory or disk drive, which (inaudible) provided a year ago. And third, higher margins on newer products, such as the UIO and 1U Twin, offset in part by higher inventory reserves in the second quarter of fiscal year '08 of approximately 1.8%.

On a sequential basis, non-GAAP gross margins increased from 19.6% in Q1 to 20% in Q2, due primarily to higher revenue on server solutions, which generally carried a higher margin than components. On a year-over-year basis, non-GAAP operating expenses totaled 14.2 million for the second quarter, or 10.4% of revenue, up from 9.6% a year ago. The year-over-year absolute dollar increase of 3.3 million was primarily due to additional headcount to support the continuous investment in our product line and the ramp in our revenues.

The Company's headcount grew by 186 from 548 at Q2 fiscal year '07 to 734 at Q2 fiscal year '08, primarily in the areas of R&D and production. Overseas headcount during this period expanded from 87 to 131, and is included in the total headcount number I just provided.

On a sequential basis, non-GAAP operating expenses was up 1.1 million, or 8.4%. The Company's headcount grew by 73, from 661 at Q1 fiscal year '08 to 734 at Q2 fiscal year '08, primarily in the areas of R&D and production. The increase in operating expenses was primarily due to the higher salary and payroll expenses associated with this headcount increase.

Non-GAAP operating profit for the second quarter was $13.2 million or 9.6% of revenue, up 5 million, or 61.5%, from 8.2 million a year ago. The increase was primarily due to our revenue and gross margins, offset in part by increases in our operating expenses to support the growth of the Company, and the overhead associated with being a public company.

Non-GAAP operating profit on a sequential basis was up 3.1 million, or 31%, from 10.1 million or 8.5% of revenue in Q1, primarily related to the higher revenue and gross margins discussed above. On a year-over-year basis, non-GAAP net income for the second quarter was 8.6 million, or 6.2% of revenue, which is up 3.2 million, or 60.5%, from 5.3 million, or 4.7% of revenue a year ago. On a sequential basis, non-GAAP net income was up 2 million, or 30.5%, from 6.6 million in Q1.

The tax rate for the second quarter on a non-GAAP base was 36%, compared to 32.3% a year ago. The increase in our tax rate this quarter compared to last year was due to (inaudible) in our benefits from R&D credits, due to the timing of congressional reinstatement of the tax credit last year.

Our non-GAAP fully diluted EPS for the second quarter was $0.22 per share, compared to $0.16 per share a year ago. Fully-diluted shares used were 38.9 million compared to 32.5 million a year ago. Fully-diluted shares increased by 6.4 million share offered in the Company's IPO which closed on April 2, 2007. On a sequential basis, our non-GAAP fully-diluted EPS increased by $0.05 per share from $0.17 in the first quarter.

Turning to the balance sheet on a sequential basis, cash and cash equivalents and short-term investments were 64.7 million, down 4.7 million from 69.4 million in the prior quarter. The decrease is primarily due to the purchase of a new building (inaudible) on June 28, 2007 for 11.3 million, offset in part by 8.5 million of positive cash flow from operating activities during the second quarter.

Accounts receivable increased by 5.1 million to 45.8 million, and DSOs remained the same at 29 days from Q1 fiscal year '08. Inventories increases by 19.2 million to 92.7 million, with days in inventory increasing by two days to 70 days. The increase of two days was due to our continuing to ramp our revenue. Inventory reserves were 13.1 million, compared to 10.9 million in Q1. The percentage of inventory position was the same between quarters.

Accounts payable increased by 24.5 million to 94.6 million, with the days payable outstanding increasing to 69 days. The increase in days was primarily due higher inventory levels as described above.

Land and building was 38.3 million, representing approximately 352,000 square foot of property in San Jose, California at the end of Q2. As previously indicated in the press release and the 8-K filing, the Company closed escrow on a building located 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 70% of the value to land and 30% to building, which is depreciated over 39 years.

Now for a few comments on our outlook. The server industry has historically experienced seasonal revenue weakness in the quarters ending September 30 and March 31 of fiscals Q1 and Q3. However, we have seen also benefits from revenue traction following introduction of new products. The Company expects that both trends will continue this quarter and the new products introduced during this period's prior quarters should offset in part the impact of seasonal weakness. As a result, we expect revenues to be in the range of 137 to 142 million for the third quarter of fiscal year 2008, ending March 31, 2008.

In addition, the Company reconfirms the guidance provided on November 14, 2007 regarding fiscal year 2008 revenue and net income. The Company continues to expect that as compared to fiscal year 2007, for fiscal year 2008 revenues from server products will grow by about 50%, total sales will increase by a minimum of 30%, and net income will increase by a minimum of 35%.

It is currently expected that the outlook will not be updated until the release of the Company's next quarterly earnings announcement. Notwithstanding subsequent development, 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. Super Micro had a very good quarter with record high revenue and profitability. We are (inaudible) our leading edge product, (inaudible) and our ability to deliver applications, optimized solutions, and efficient and timely (inaudible) to our customers around the world who have been (inaudible). We continue to drive our sales worldwide to fully optimize our business through innovation and expansion. This quarter, our San Clemente chip-set based Xeon quad-core (inaudible) solutions have gone into high volume production (inaudible) of our Whisper Quiet High Performance Workstation to our already broad and innovative product line. I believe we will have another record high quarter in revenue.

Thank you all for joining us on our earnings conference call. With that, we will open the call to questions.

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

Good afternoon. Could you--can you hear me?

Yes.

Okay. Could you maybe talk a little bit about the offsetting factors of seasonality and the new products? So first, talk about seasonality, whether you're seeing that should be more severe than normal or about like normal. And then, in terms of the new products, any sort of quantification you can help us with. How much did new products sort of make up of your revenues this past quarter, and how do you expect that to roll out?

Okay. Thank you. Charles, again. Basically, in the history the March quarter we have seasonality (inaudible) quarters. However, with the--we have a very strong product line. Like we just mentioned, our 1U Twin, our high density server, has been growing very well. And we believe this trend will continue for the next couple quarters at least. As well, our UIO, universal IO, which we introduced last March--about nine months ago. This product line also continues growing. And again, (inaudible) features we provide.

Also, I just mentioned (inaudible) Xeon (inaudible) that offers a lower power consumption solution for servers and workstations. So we have that product line just in--going in production--(inaudible) production (inaudible). Together, we (inaudible) Whisper Quiet and for first time we introduce very quiet workstation solutions to the market. We call it Whisper Quiet Workstation Solution. So we (inaudible) exceptional product. I believe our March quarter we should have a record high in revenue again.

Can you--just as a follow-up, can you talk about the--aside from the new products, can you talk about the level of seasonality and kind of macro factors you're seeing out there? Are you seeing any scaling back in spending or anything along those lines due to the overall macro environment?

Yes. (Inaudible) last year--I mean (inaudible) months ago, our March quarter dropped a little bit from last year December one year ago. But this year, should be different, because again, our very strong product line--new products. So I believe, like Howard just mentioned, this quarter we foresee 137 to 142. So we should be able to see some growth, although maybe not a lot because of traditional seasonality.

So Howard, do you have--?

Yes. Glenn, like I said, to characterize those, Charles (inaudible) some numbers in the past. Our last quarter results--a year ago we had about 113 million. The next quarter we had about 105. But this quarter, we're going from the 137 we just reported, and our range is 137 to 142.

Our next question goes to Jeff Fidacaro at Merrill Lynch. Please go ahead.

Hey, Charles. I was wondering if you could talk a little bit more, staying on the new products, about the ramp up in the 1U Twin, the UIO, and also, you recently started shipping the Super Blade product. I wonder if you could give a little bit more color about how those products are ramping, and especially on the 1U Twin, if you could talk about any OEM or increased OEM interest.

Yes, indeed. The 1U Twin, the solution we introduced about three months ago, this product has been growing very successful and (inaudible) our expectation, so kind of very nice product. And we see--we have a strong confidence that this product line will continue to grow, both in--with new technology--the new chip-set, the new (inaudible), and new system architecture. So we are growing multiple dimensions with the 1U Twin solution.

So in next couple quarters, this product will continue to grow. That we strongly believe. As to UIO, again, we--also a brand new architecture we just introduced nine months ago. So this product follows 1U Twin. We also have a very strong confidence that it will continue to grow.

As to chip upgrade, because we have a lot of customers asking for (inaudible) and (inaudible) are UIO. So indeed, we had (inaudible) resource, about six months in 1U Twin and UIO. So the chip upgrade continues growing as mostly--but the volume schedule a little bit late. So we start volume production about four months ago and the quantity is growing mostly not very fast. However, we see the booking from customer is getting stronger and stronger. So for chip upgrade, especially optimized for data centers and the one optimized for office environment, I mean, [50/50], right, really quite a (inaudible) solution. We have very strong confidence that the quantity will start to grow quicker starting this quarter, maybe (inaudible) next month.

Okay. And if we could just touch on the gross margins. Clearly, getting into the 20% this quarter above sort of the 18 to 19% range, could you talk a little bit about sort of the components within there? In other words, was pricing components down a majority of it? Was it economies of scale? And how should we think about this going forward as you saw a bigger percentage of the revenues on the servers?

Yes, Jeff. This is Howard. I think you'll see that most of the gross margin indicates (inaudible) because it was [built] by the shift to our server revenue. You see that going up to about 42%. And so, that shift, as you know, the components have a lower gross margin than our complete server solution in general. So as we shift to a more complete server solution we gain higher margin.

It's (inaudible) our 1U Twin and UIO. As you know, it's a brand new architecture, so customers (inaudible) higher price for performance and [feature sets]. And this trend basically is continuing.

And our next question goes to Josh Sloan at Glacier Bay Capital. Please go ahead.

Hey, guys. Really good quarter. We especially like to see the margin expansion there, so good job. On the blade product, could you go into that a little bit more? I mean, do you have product now that addresses all segments of the market and is there something competitive that's making it a little slower than you thought, or do you just expect it to ramp up over the next several quarters?

Okay. Yes, I mean, we (inaudible) high volume, as we said earlier. But again, because of the strong interest in 1U Twin and UIO that kind of made us have to allocated some more engineering and power in this product. However, now we are getting back to (inaudible) again. So enterprise (inaudible) we have started shipping about four months ago. And office (inaudible) running at a 50/50 very low noise level and 93% high efficiency, basically will be in volume production by next month.

So that product we have seen lots of interest and some POs from customers. As to our data center optimized blade, also will be in volume production next month. So it is getting going.

How does the size of the blade market compare to sort of where you compete right now? Do you expect that to be a major driver over the next several years?

Yes. I mean, for blade servers, our worldwide market grows about 55% year-over-year. So compare with (inaudible) grow that (inaudible) about 5% or 6%. So (inaudible) grow much faster globally. So as to (inaudible) now becomes a big product line for us. We just start shipping four months ago (inaudible) kind of small, but for long term that's an (inaudible) for us in terms of revenue and profitability.

At one point you guys were talking about building a software server management product. Is that still on the table?

That product (inaudible) continuing--continued. So I believe about this summer or this fall we should have a better (inaudible) customer. So again, it's a long term investment, but we start from a hardware business, and then gradually we provide some server management products two years ago, and the product now is growing and it's very important (inaudible) especially for long term success.

(OPERATOR INSTRUCTIONS.) We're going to go next to Kenneth Miller at Bonanza Capital. Please go ahead.

Afternoon, gentlemen.

Afternoon.

I wanted to clarify your guidance a little bit. One thing I don't fully understand. You gave guidance of revenue of at least 30%--revenue growth of at least 30% and net income growth of at least 35%. It looks to me like your net income is growing 60% year-over-year. And so, could you maybe talk about where you expect operating margins to go directionally and why the differential between your revenue growth and your net income growth isn't greater than 35%?

Yes, Kenny. This is Howard Hideshima. Again, the 35% is on an annual basis. So again, while the quarter over quarter is 60%, the annual is what we're giving guidance to, as far as the 35% minimum, the (inaudible) minimum growth in net income.

But if I'm doing the math quickly here, you're year over year net income growth was actually more like 56%, so really not far off.

Yes, I would say basically we make a conservative presentation for the market.

Well, directionally, where do you expect your operating margins to go for the rest of the year? Do you expect them to maintain at the almost 9% level or do you think they'll go down the next couple of quarters because of investments in operating expenses?

I think, historically, Kenny, if you take a look at our percent of operating expenses compared to where we are, we're running fairly consistent historically. And the Company over the last couple of years has been very consistent with regards to where its operating expenses have been on a percentage basis of revenue.

So can you comment on where you think the operating margins could go in the next couple quarters or not?

We haven't given guidance within the income statement.

And we'll go next to [John Roth]. I believe it's [Argon Capital]. Please go ahead.

Hi, guys. Just a couple quick questions. One, could you give me again what the CapEx number associated with the building purchase was?

Yes. 11.3 million.

Okay, that was 11.3. And I noticed as well there's a new long term liability on the balance sheet. What is that?

It's--we had a new accounting (inaudible) pronouncement come out called FIN 48.

Okay.

It's basically the--that was the shift of the tax payable from--payable down below to accrued liability.

Okay, I see. And the last thing, I guess you guys usually talk about this in the Q, but can you tell me what the charge was in this quarter for adjustment of inventory?

1.8%.

1.8% of revenues.

Right.

Okay, great. Okay, thanks very much.

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

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 Computer, Incorporated Second Quarter 2008 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.