超微電腦 (SMCI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro Computer, Inc., Fourth Quarter and Fiscal 2008 Year-End Conference Call. The Company's news release, issued earlier today, is available from its Website at www.supermicro.com.

During the presentation, all participants will be in a listen-only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question and answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded Wednesday, August 06, 2008, and a replay of today's call will be accessible until midnight, August 13th, by dialing 1-888-203-1112 and entering conference ID number 4932185. International callers should dial 1-719-457-0820.

And now, I would like to turn the conference over to Mr. Pierre Hirsh. Mr. Hirsh, please go ahead, sir.

Thank you, Nicole.

Good afternoon, and thank you for attending Supermicro Computer's Conference Call on financial results for the fourth quarter and full fiscal year 2008, which ended June 30, 2008. 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 which may be accessed either on the company's Website at 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.

Addition 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 advance notification of this conference call by way of a news release issued on July 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 do not include discussion of any material non-public information. If you are interested in such a meeting, please contact Howard Kalt at 415-692-3059 or via e-mail on the Company's Investor Relations page on the Website.

The Company will be presenting at the 27th Annual Canaccord Addams Global Growth Conference at the InterContinental Hotel in Boston, Massachusetts, next Thursday, August the 14th. Charles Liang, President and Chief Executive Officer, and Howard Hideshima, Chief Financial Officer, will appear at 9:30 a.m. Eastern time, 6:30 a.m. Pacific time.

A live Webcast of the presentation will be available at the Event and Presentations page on the Investor Relations section of the Company's Website, and a replay of the Webcast will be available at the same location until September 14, 2008.

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

Thank you, Pierre, and good afternoon, everyone.

Supermicro has a history of consistent growth and popularity over the past 15 years, and this year is not different. Our revenue grew $120 million over 78.6% to $440.5 million in fiscal year 2008 and our net income grew 36.2%, over $7.7 million, to $29.1 million.

This quarter our revenue reached a record $148.9 million which is an increase of 34.2% compared to the same period last year. Net income of $8.1 million is 32.7% higher compared to a year ago.

We started to have this from a benefit from our significant investment in both R&D and infrastructure, which the Company had met over the past year to drive both our short and long-term growth potential. I feel that we are finally in position to take an advantage over technology challenges and have our partners meet in the challenge that they are facing.

In particular, our base SuperBlade solution won the best green data center solution award at the blade system insight 2008 technology conference, and the base SuperBlade solution at the CRNTech portal review in May, 2008.

In the treating components combined with our unmatched earth-friendly power reasons, as well as our other means, Super SSI gray architecture (inaudible) for all server environments, seeking to optimize both performance and power consumption.

In today's sensitive market, our superior performance co-op blade server with up to 93% power efficiency, higher efficiency server boat design, optimizing server optimization and other factors help our customers save up to $3,000 on electrical (inaudible) over three years and reduce their total costs of ownership co-op TSO. In the meantime, it will also reduce up to $0.16 of CO2 emission into our environment.

Our demand server design innovation continues to win more and more recognition and awards. Both of these awards highlight the strength of Supermicro and the great opportunity we have to extend our business into a new market.

We also just launched a number of high-end one new and full use super server and storage solutions optimizes for 2.5-inch fast in center hard drive. By combining our high visionary power surprise (inaudible) and thermal subsystem design with our energy savings at an advantage of 2.1-inch hard drive, customers typically save $200 to $300 per server over three years which is crucial to enterprise and energy console customers.

In additional to lower (inaudible), 2.5-inch drivers enable higher (inaudible) empowering these servers to deliver up to 50% greater system performance in the same sort of cream.

Our development of next-generation Intel QPI, quick pace interconnection, base recommend and base servers, storage products and all stations systems have been quite complete. The titanium-based project continues to be on course as well as AMD Shanghai-based servers.

We can not elaborate on that details, our base development, for Company safe reasons, but sure Supermicro will play a significant load in the next [indotree] launch of X86 mainstream servers. Our historical record indicates that new technology transition periods always provide a great opportunity for Supermicro to grow our business, mostly in revenue and probability.

We also started to enrich our embedded (inaudible). We had introduced some truly optimized embedded [Amembo] and CHASI product lines and regularly growing our customer base in this much segment.

These are just a few examples of continuing R&D work we are doing here at Supermicro. By that reason, the investment we made to our R&D and infrastructure (inaudible). We have improved our ability to deliver leading-edge (inaudible) market products, a stronger reprieve. These investments are better positioned the Company for strong future growth.

Let me also provide a fuller detail on the status of some expiring options which was discussed in the press release. I elect to take about $975,000 (inaudible) stock option grants dating back to 1998. They are scheduled to expire later this year.

And in change, those options to retreat share with a five-year invested period which is subject a rather exciting under 10B5 programs. I believe Supermicro's full pressure has yet to see it reach, and this is why I have chosen to think forward our benefits from selling this share as of this moment.

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 number's appear in the new 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 expense. Reconciliation of the 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 fourth quarter income statement. Revenue of $148.9 million for the quarter was up 34.2% from the same quarter a year ago. The growth, on a percentage basis, was fairly equally distributed with revenue from server solutions increasing by 1.1% to 38.7% of total revenues.

Unit volumes on server systems increased 32.4% year-over-year, from 34,000 to 45,000 units. ASPs for servers was up on a 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 bundled server solutions, and sale of our innovative products such as 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 fourth quarter. Furthermore, 60.1% of our revenues came from the US, and 55.5% from our distributors and resellers.

Internet Data Center revenues was 15.4% compared to 6% in the fourth quarter of fiscal year '07. On a sequential basis, net revenues increased by 8.9%, or $12.1 million, from $136.8 million in the third quarter. The increase was primarily from server solution sales which increased 20.4% from the prior quarter.

Non-GAAP gross profit was $28.6 million for the quarter, up 42.4% from $20.1 million in the same quarter last year. Non-GAAP gross margin was 19.2% of revenues, up from 18.1% a year ago and from 18.2% in the third quarter, due primarily to the sales of previously reserved items, new products and higher revenue mix of server solutions.

Price changes from Ablecom resulted in a zero basis point change to our gross profits in the fourth quarter, with total purchases representing approximately 19.1% of total cost to goods sold, which is down from 28.8% a year ago.

On a year-over-year basis, non-GAAP operating expenses total $16.7 million for the fourth quarter, or 11.2% of revenue, up 1.1% from a year ago. The year-over-year absolute dollar increase of $5.5 million was primarily due to additional headcount to support the expansion of our product lines and additional work we are doing for our partners, and additional expenses associated with SOX compliance.

On a sequential basis, non-GAAP operating expenses was up $1.1 million, or 6.8%. The Company's headcount grew by 4, from 799 at the end of the third quarter of fiscal year 2008 to 803 at the end of the fourth quarter of fiscal year 2008.

The increase in operating expenses was primarily due to higher salaries and payroll expenses associated with the increased headcount in the prior quarter and higher material costs associated with the support of product development.

Non-GAAP operating profit for the fourth quarter was $11.9 million, or 8% of revenue, up $2.7 million, or 29.6%, from $9.2 million a year ago. Non-GAAP operating profit on a sequential basis was up $2.5 million, or 26.3%, from $9.4 million in the third quarter of fiscal year 2008.

On a year-over-year basis, non-GAAP net income for the fourth quarter was $8.1 million, or 5.4% of revenue, which is up $2 million, or 32.7%, from $6.1 million non-GAAP net income a year ago. On a sequential basis, non-GAAP net income was up $2.1 million, or 34.9%, from $6 million in the third quarter.

The tax rate in the fourth quarter on a non-GAAP basis was 32.1%, compared to 33.7% a year ago. The decrease in our tax this quarter compared to last year was due to the benefit from R&D credits provided by the increase in R&D expenses we did this year.

Our non-GAAP fully diluted ETS for the fourth quarter was $0.21 per share, compared to $0.16 per share a year ago. Fully diluted shares used were 39.1 million compared to 38.9 million a year ago. On a sequential basis, our non-GAAP fully diluted EPS increased by $0.06 per share, from $0.15 in the third quarter.

Turning to the balance sheet on a sequential basis, cash and cash equivalents and short-term investments were $67.6 million, up from $59.4 million in the prior quarter. The increase of $8.2 million is primarily due to net income of $8.1 million.

Accounts receivable increased by $7.4 million to $49.5 million, and DSOs was 28 days compared to 30 days in the third quarter. Inventory decreased by $7.7 million to $85.7 million, with days in inventories decreasing by eight days to 68 days. The decrease in days was due to lower average inventory levels as we sold off some (inaudible) reserve inventory and improved our efficiency in managing our inventory.

The inventory reserves were $14.4 million compared to $14.8 million in the third quarter. The percentage of inventory revision decreased by 1.5% to 0.1% in the fourth quarter. The total inventory reserves as a percentage of inventory increased from 13.7% to 14.3% between the third and fourth quarter of fiscal year 2008 respectively.

Accounts payable increased by $1.2 million to $81 million, with the days payable outstanding decreasing from 72 to 61 days.

Now, a few comments on our outlook. The Company expects net sales to grow 24% to 26% in the first quarter of fiscal year 2009, ending September 30, 2008, compared to the first fiscal quarter of last year, which represents a range of $147 million to $151 million in net sales.

Supermicro has historically seen seasonally slower rates of growth in net sales in the fiscal first quarter. The Company expects this trend will continue, with the impact partially offset by sales and new products introduced during the prior quarters.

In addition, the Company expects non-GAAP earnings per diluted share of approximately $0.18 to $0.19 for the first quarter. For the full fiscal year 2009, the Company currently expects net sales growth of 24% to 26% over fiscal year 2008 net sales, which represents a range of $670 million to $680 million. The Company also expects non-GAAP earnings per diluted share of approximately 89% to 94% for the full fiscal year 2009.

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, the Company may update the outlook or any portion thereof at any time.

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

Thank you, Howard.

During fiscal year 2008, we made significant investments to grow our research and development resources including an increase of 53% new hiring in engineering and accounts, part of new infrastructure and facilities. These investments will play a significant load to support our growth for both short-term and medium-term.

As we enter fiscal year 2009, we will continue to drive full service market technology development with our broad product offering including the new-generation (inaudible) QPI which features the base cast interconnect (inaudible) and performance.

Our full service market is an advantage. We are also extending to our new-generation titanium solutions in AMD Shanghai-based (inaudible), QPI infinitive technology and more. In addition, we will introduce new technology and features such as (inaudible) connectivity, higher efficiency power architecture to enhance our SuperBlade, UIO one-inch screen, and 2.5-inches hard drive server storage solutions.

With such a strong foundation, I am confident that Supermicro will have another great year with a conservative estimation of 24% to 26% growth in both revenue and probability.

With this, let's open for questions. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS.) Alex Kurtz, Merriman, Curhan & Ford.

Hey, guys. (Inaudible) and congratulations on a great quarter. Can you hear me, by the way?

Yes, I hear you.

We can.

Great. So, I have more than a couple of questions, but I'll just take a couple first and pass off for a second.

What's the overall tone of your business, maybe linearity, towards-- in the quarter as you head into the September quarter? What are you seeing from customers? What's sort of the macroeconomic environment for your customers in relation to the top-line guidance that you gave?

Yes. Alex, this is Howard speaking.

With regards to this quarter, it's typically seasonally lower quarter than the rest of our fiscal year. So, on the macro trends, while the rest of the economy seems to be slow, it doesn't seem to be affecting the IT area as much. It's still looking okay in the IT area.

Yes, compared with last year, we see an estimate 24% to 26% growth both for revenue and (inaudible).

Okay. So, would you say the linearity in the June quarter, Howard, was pretty standard for you?

Yes, it was.

Okay.

Yes, certainly linear.

Okay.

And then, just on a couple of model questions real quick and I'll pass it off. What's going to be the non-GAAP tax rate for fiscal '09?

Yes, I think when we look at it historically, not counting on models, but historically, you'll see it anywhere in about the 36% to 36.5% range.

Okay.

And then, the gross margin obviously had a nice uptick this quarter. Can you talk again-- I know you mentioned earlier, but can you talk again the drivers behind that and how we should be thinking about modeling gross margin going forward?

Yes, I think with regard to gross margins, I think we've always said that building our economy is one of the top priorities for the Company. We said that during fiscal year '08 and we continue to believe that going into fiscal year '09.

Opportunities do exist for us, though, with the new launches of QPI, as Charles has mentioned, and Shanghai from AMD and a number of other new technologies, so we'll be able to take advantage probably during the second half of our year.

So, when--.

--Do you think you could get back to the 19% range?

It's either in that type of quarter, we saw already a career change kind of. We're now an economic scale grow. Gross margin is also growing consistently.

Okay.

And then, finally, it looks like you guys did about $9 million in cash flow in the quarter and roughly $8 million in free cash flow. Is that about right, Howard?

Yes.

Okay, thanks a lot. I'll follow up later.

Glenn Hanus, Needham.

Let me try the gross margin this way. So, Howard, how much was the one-time benefit this quarter from that item you mentioned? What would the gross margin-- however you want to answer it. What would the gross margin had been without that one-time benefit for the sale of the inventory and the reversal or whatever?

Yes, Glenn, it probably contributed about 1.5% to the overall gross margin for the fourth quarter. And basically, we continue to look at opportunities to sell some of the product we have previously reserved.

So, while we can't predict it, we go with the best forecast for our reserves that we can. We can't predict when that will come in or out per se. So, again, in taking that out, if you take a look at last year, fiscal year '09, our total gross margins for the year were 19.3% for the entire year.

So, that's better than last year.

That's better than 17.9% in fiscal year '07.

Right, okay. So, it was about 17.5% for the quarter basically without it?

Probably about 18% without--.

--About 18%?

Yes.

All right.

And then, going forward, you're saying you can get some benefit from these new-- some of the new products, the QPI related and the others you mentioned. And should we think about that starting to kick in, in the September quarter, or is that more in December?

It will be-- those new products start to be available quarter after quarter. So, it's kind of growing. Last year, we already shipped some new product. This quarter, we will have some more, and then we'll start to grow.

And not just there. The base server also comes with some better gross margins to our business.

Okay, I'll-- thank you.

Jeff Fidacaro, Merrill Lynch.

Hi. Howard, maybe you could talk a little bit about the OpEx side. When we took a look at R&D as a percent of revenues, it ticked up a bit to about 5.9% as well as overall operating expenses. Do you have the headcount in place that you're comfortable with going forward, and should we see that R&D as a percent of revenues sort of tick down from here now?

Indeed, because last year we already hire 53% new engineers in one year, that was very aggressive, and those engineers basically have been well trained. So, this year in hiring in engineering will be much more conservative because, today, we have a much stronger engineering team now. So, we will continue to hire, but with lower hiring than last year.

And Jeff, to talk about the fourth quarter again, the increase there you saw was probably more of a topping off of the headcount, expenses from topping off the headcount that we had in the prior quarter. And so, we only hired about four people in the fourth quarter.

If I could just ask one quick follow-up as well, Charles, when you take a look at the landscape into fiscal '09, what trends are you seeing on the server side? Where are people really focused as far the requirements? And I'll just leave it there.

The power savings surprised me a little bit and the peek hole really emphasized three looking for higher efficiency computing now. And we are very happy that we are already signing high efficiency computing. So, with our estimation, our operate server has been (inaudible). Most are green (inaudible) solution, and those (inaudible).

So, not yesterday, recently, we introduced the concrete 2.5-inch 1UTU server install reach. All of those become very hot in the market. So, we are very confident that in the coming years, coming quarters or even years, people will continue to look for better power consumption, or you can say better performance per watt design.

Great, thank you for your time.

Thank you.

John Roth, Argent Capital.

Hi, guys, a couple of quick questions for you. One--.

--John, can you speak up just a little bit? Sorry.

Yes, I'm sorry.

A couple of quick questions. The first, what is a reasonable assumption going forward in terms of stock-based comp expense? Is sort of $1 million to $1.5 million reasonable for modeling purposes going forward?

Yes, John, I think-- we don't see anything changing from what our historical pattern has been previously.

Okay, okay, good.

It looked like there was an account on the balance sheet, about $4 million of other long-term liabilities. Could you let me know what that is?

Yes, that was the-- when we adopted SIM 48, moving the tax liability around to the accrued liability side.

Okay, okay.

And last of all, could you maybe help me understand just a little bit better the transaction to exchange Mr. Liang's expiring options for restricted stock? Is it kind of fair to summarize as basically Mr. Liang doesn't-- as a result of rolling into restricted stock, he doesn't have to put any cash out for options exercise and, in exchange, he's effectively agreed to lock those shares up for some period as a result of the vesting period? Is that the way I should be looking at that?

(Inaudible.) Personally, I believe the stock price has been, in that respect, not too valuable and also to pre-amend a sale in lots of stock at this moment. So, we've got Company-approved to see full 925,000 share to retreat share for the next five years. So, that's basically good for push and also good for investor trade. Howard can give you more--.

--And John, just to answer your question. They aren't-- no, it's not just a straight exchange, share for share. Actually, the exercise prices will be taking shares back by the Company. So, it's not like Mr. Liang is getting free shares back in exchange for these.

Yes. No, no, I understood that, but I guess what I didn't fully understand was why roll into the restricted stock as opposed to just exercising the options and holding the shares?

Yes. With regards to the restricted shares, the tax liability occurs as the shares vet, where if you do an exercise today, per se, the taxes are due today.

Okay, okay, okay. That makes sense. Okay, great. Thanks very much.

Michael Bertz, Kennedy Capital.

Thanks, gentlemen. A nice set of results.

Just two things, then, for me. One in terms of-- on the previously reserved stuff, I mean, can you talk, Howard, a little bit about-- obviously, you can't predict that going forward, but either, one, in terms of how much you have currently sitting-- that you have reserved and, two, if there's anything you can talk about that's proven average of what we might have seen over the last few quarters?

Yes. I mean, our total inventory reserve for the last couple of years, including this year, has been about 1.2% of net income, total year's net income. On average, I think fiscal year '08 will be about 1.3% of total revenues. Fiscal year '07 was about 1.3% also. So, it's very consistent between years.

We get opportunities-- we have about $14.3 million of reserves against our inventory right now. But, we're always looking for opportunities to basically reutilize that product that's been reserved and find a different application, so we can sell it.

Okay.

And then, secondly, as you look across the business, is there anyplace you can look at for-- any trends that you're seeing, whether it's maybe some of the embedded business that you're doing or places of strength or any relative weakness?

I mean, obviously, it's clear, it seems you're doing pretty well fairly across the board, but any place where you're seeing things that maybe surprise you a little bit, where things were a little bit stronger than you would have expected?

Yes, we had a part embedded in the market for field, but recently we found it is a difficult market. So, we emphasized in R&D, embedded in part '09, and now the transfer market has been great. So, we will continue spend more in this area, both in R&D and sales and marketing.

Okay. Thanks, gentlemen.

Thank you.

Manoj Nadkarni, Chip Investor Group.

Hi, good afternoon, and congratulations on a record quarter.

Thank you.

Yes, thank you.

Yes. Can you give some color around and review where you are seeing a strong growth geographic-wise and end market-wise? You mentioned Internet data centers being strong. Can you give some color around that and other areas?

We just mentioned embedded, right? Embedded is an area we believe we have a good growth for our P&E. And data centers, yes. I mean, our economic scale continues to improvement. So, we find that we are getting stronger quarter after quarter in data center business as well. So, in that two years, we have seen that consistent improvement in data center business.

Other than that, our chief (inaudible) which in high-put end production about six months ago have been continuing growing. And with our higher end switch connectivity (inaudible) will be available quarter after quarter. We do believe one-inch server for both HPC application and data center will be another quick growing area for us.

All right. Well, again, congratulations, and thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) Adam Kurtz, Merriman, Curhan & Ford.

Yes, it's Alex Kurtz, Merriman, Curhan & Ford.

So, could you give us a sense again-- you mentioned earlier about your customer concentration and that 10% in 400 customers. Howard, what was that figure again?

Yes, none of our customers make up more than 10% of our revenue during the quarter, and actually during the fiscal year either. So, we have over 400 customers and actually, for the fiscal year '08, we'll have probably over 500 customers.

Okay.

And can you just give us a sense of-- from the OEM business, was there one vertical or one technology that did especially well this quarter for you guys, or was it pretty broad-based across all of your partners?

It was pretty diversified. We are growing, for example, server (inaudible), right, and those are kind of in HPC and data center. I mean, some OEM for data centers where also some embedded. So, I would say is our feeling has been efficiently growing quite proudly, quite diversified.

And finally, do you have a figure on what percentage of revenue the SuperBlade was for you guys this year in fiscal '08?

Yes, we haven't broken that down separately. However, it's still less than 10% of our revenue.

Okay, all right. Thanks, guys.

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

Thank you, everyone, 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.

And this does conclude today's conference. We appreciate your participation, and you may now disconnect.