超微電腦 (SMCI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro Computer Incorporated First Quarter Fiscal 2009 Conference Call. The Company's news release, issued earlier today, is available from its website at www.supermicro.com.

In addition, during today's call the Company will refer to a slide presentation that it has made available to participants which can be accessed in a downloadable pdf format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

During the Company's 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, October 29, 2008. A replay of the call will be accessible until midnight, November 5th by dialing 1-888-203-1112 and entering conference ID number 4598285. International callers should dial 1-719-457-0830.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer, and Perry Hayes, Senior Vice President Investor Relations.

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

Good afternoon and thank you for attending Supermicro's Conference Call on Financial Results for the First Quarter Fiscal Year 2009, which ended September 30, 2008.

Before we begin, I'd like to advise you of upcoming investor conferences where Supermicro will be presenting. The Company will be presenting and meeting with investors and analysts at the AEA Classic Financial Conference on November 3rd and 4th in San Diego and at the UBS Global Technology and Services Conference on November 19th and 20th in New York.

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.

As a reminder, during today's call, the Company will refer to a presentation that is available to participants in the Investor Relations section of the Company's website under the Events and Presentations tab.

Please turn to slide two. Before we begin, please note that during the course of this conference call, management will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may relate, among other things, to our expected financial and operating results, our ability to build and grow Supermicro, the benefits of our products, and our ability to achieve our goals, plans and objectives. Such forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated.

These include, but are not limited to, the current economic uncertainties, our dependence on continued growth in the markets for X86 blade servers and embedded applications; increased competition; difficulties of predicting timing, introduction and customer acceptance of new products; poor product sales; difficulties in establishing and maintaining successful relationships with our distributors and vendors; shortages or price fluctuations in our supply chain; our ability to protect our intellectual property rights; our ability to control the rate of expansion domestically and internationally; difficulty managing rapid growth and general political, economic and market conditions and events.

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

Thank you Perry and good afternoon, everyone. Now let's turn to slide four. Supermicro again had starting quarter of growth and financial performance. Supermicro's revenue in the first quarter was $144.1 million, or 22% higher than last year.

Non-GAAP net income was $8.3 million or 27% higher than last year. Supermicro's non-GAAP earnings per share were $0.21 per diluted share, compared to $0.17 last year. In addition, Supermicro had record free cash flow from operations during this quarter.

I would like to briefly discuss the market for server products. Now let's turn to slide five. As we conclude, our first quarter of fiscal year 2009 on September 30, we saw the global financial has begun to affect us in both economic and our industry.

Today as we assess the market situation, we recognize that as a result for the soft economical condition, customers have shifted their requirements to application optimized and better TSO total cost of ownership server solutions.

Clearly, as it will be more important than ever to meet our customers' expectations by delivering innovative and application optimized solutions dynamically.

We believe the core strength of Supermicro viewed by EFO's strategic development, will allow Supermicro to continue to be first to market with application optimized solutions that the market requires. Therefore, we are confident that our mission and strategy will be successful in the future as it has in the past.

Our mission is to continue to be the global leader in application optimizing, high performance server solutions. Our strategies have been to maintain our time to market advantage, based on our building block solutions, expand the product offering utilizing the latest technology including blade servers, further improve our leadership in energy [savings] with server solution designs and expand into new markets and industries that require application optimized computing.

Let me talk briefly about how Supermicro is differentiated and how we will use this to our advantage. Please turn to slide six.

Over the years, at Supermicro we have invested in a strong research and development team in-house, primarily in the same business park in San Jose headquarters. This central location contributes to our time to market advantage. It helps that we are near our key technology partners and it also allows our hardware mechanical, thermal software and engineering teams and matching operationals to work together harmoniously.

And recently we said had developed the biggest array-- the largest array of server building blocks to create optimized server solutions. This key differentiator enables Supermicro to be flexible and fast in creating solutions. This satisfies the needs of our customers' application at the best price performance ratio.

We are confident that our strength will allow Supermicro to continue to have outstanding performance, even in the current economic climate. We are well positioned to execute our strategy leadership, our technology leadership by expanding product growth and by offering the most competitive price to performance server solutions.

In addition, our competitive advantage will also extend to our ability to offer best power efficient server architecture which will further lower the total cost of ownership.

Now let me talk about some of our main product innovations that will be released in the next future quarters. Please turn to slide seven.

As you know, we have been developed in multiple product lines based on some of our key new technologies which include the QPI based Nehalem VP, viewer processor, and four-way servers. We are going to release more than 20 different server boards designed, plus more than 37 server storage platforms with several key new features, AMD Shanghai processor based platform, and the new Boxboro based itanium platform, a QPI itanium platform, higher density blade server with QDR InfiniBand technology like our new twin innovation.

Our new blade server will support two EP nodes in one single blade. This will not just increase the computing capacity, but will also reduce the hardware cost per node and the system power consumption.

And then 10G Ethernet controllers and switch product lines, especially the HPC optimize, (inaudible) 10G switch for both blade servers and (inaudible) servers.

Supermicro's ability to deploy those new technologies and to expand our product offering will enable us to continue our technology leadership. Based on these strong product lines, I am confident that our business is well-positioned for continued success.

Now I would like to turn it over to our CFO, Howard Hideshima, who will discuss our financial results and outlook for the coming quarter. Howard-?

Thank you, Charles and good afternoon, everyone. I will focus my remarks on earnings, gross margin, 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 and in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with the review of the first quarter income statement. Please turn to slide eight.

Revenue was $144.1 million, up 22% from the same quarter a year ago and down 3.4% sequentially. Slide nine--

The proportion of revenue from server systems was essentially flat year over year and represented 38.7% of total revenue. ASP per server was up on a year-to-year basis from approximately $1200 per unit, to $1300. The increase in server revenue was primarily due to higher sales of our OEM and complete integrated server solutions and sales of our innovative products such as UIO and 1U Twin.

We continued to maintain a diverse revenue base, with none of our over 400 customers making up more than 10% of our net sales in the first quarter. Furthermore, 66.2% of our revenues came from the US, and 62.6% from our distributor and resellers. Internet data center revenue was 7.5% compared to 8.6% in the first quarter of fiscal year 2008. Slides 10 and 11--

Gross profit was $28 million, up 20.8% from $23.2 million in the same quarter last year, and down 2.2% from $28.6 million, sequentially. On a percentage basis, gross margin was 19.4%, down slightly from 19.6% year over year, and up from 19.2%, sequentially.

Price changes from Ablecom resulted in a 0 basis point charge to gross margins in the first quarter, with total purchases representing approximately 27.3% of total cost of goods sold, which is up from 23.3% a year ago.

The year-over-year decrease in gross margin resulted from a decrease in standard margins due to higher complete system sales, including integration of memory and hard disk drive; offset in part by the sale of previously reserved items.

The sequential improvement in gross margin resulted from beneficial pricing adjustments for materials, which was partially offset by higher freight charges. Slide 12--

Operating expenses were $14.9 million, up from $13.1 million in the same quarter a year ago, and down from $16.7 million, sequentially. As a percentage of revenue, operating expenses was 10.4%, down from 11.1% year over year and down from 11.2%, sequentially.

The year-over-year and sequential decrease in operating expense ratio resulted from the winding down of certain consulting arrangements associated with SOX compliance.

With regard to R&D expenses, as we said last quarter, headcount addition and expenses are leveling out and when combined with reduced expenses for routing in Nehalem product rollout, we experienced a reduction in R&D expenses sequentially.

The year-over-year increase in R&D expenses was primarily due to headcount additions, offset in part by a reduction in blade product development expenses, as we rolled out the blade products last year.

Operating profits was $13 million or 9.1% of revenue, up $3 million or 29.8% from $10.1 million a year ago and up $1.2 million or 9.7% sequentially.

Net income was $8.3 million or 5.8% of revenue; up $1.8 million or 27% from $6.6 million a year ago and up $0.3 million or 3.4% from $8.1 million, sequentially.

Our non-GAAP fully diluted EPS was $0.21 per share, up $0.04 from $0.17 per share a year ago and flat at $0.21 per share, sequentially. The number of fully diluted shares used in the first quarter was 39,559,095.

The tax rate in the first quarter on a non-GAAP basis was 36.1% compared to 36.6% a year ago and 32.1% sequentially.

Similar to fiscal year '07, the R&D credit was reinstated retroactively during the second quarter of fiscal year 2009. And we expect the effective tax rate will be similar to the 31% during the third quarter of fiscal year 2007 when the credit was reinstated previously.

Turning to the balance sheet on a sequential basis; slide 13-

Cash and cash equivalents and short and long-term investments were $79.9 million, up $12.3 million from $67.6 million in the prior quarter. In the first quarter, free cash flow was $11.3 million and the net change in cash was $13.3 million. Slide 14--

Accounts receivables decreased by $3.3 million to $49.5 million and DSO was 31 days compared to 28 days in the prior quarter.

Inventories increased by $15.2 million to $100.9 million with days in inventory increasing by six days, to 74 days. The increase in days was primarily related to additional inventory to prepare to support the growth of the Company and the launch of new products associated with the Intel and AMD product releases. Historically, the Company has had higher days of inventory surrounding new product launches.

Accounts payable increased by $5.9 million to $86.9 million with the days payable outstanding increasing by five days to 66 days.

Overall, cash cycle days were 39 days, an increase of four days from 35 days in the prior quarter.

And now for a few comments on our outlook; as we completed our first quarter of fiscal year 2009, Supermicro and others in the technology sector have witnessed events that affected the global financial markets and impacted the outlook for economic growth. Until the economic condition stabilizes, Supermicro will provide a wider range of guidance that reflects the current period of lower economic visibility.

In addition, Supermicro will only provide an outlook for the upcoming quarter. For the second quarter of fiscal year 2009 ending December 31, 2008, the Company expects net sales within a range of $140 million to $150 million. This represents an increase between 2.2% to 9.5% as compared to the second fiscal quarter of last year.

In addition, the Company expects non-GAAP earnings per diluted share of approximately $0.18 to $0.22 for the second quarter. It is currently expected that the outlook will not be updated until the release of the Company's next quarterly earnings announcement. Notwithstanding subsequent developments however, the Company may update the outlook or any portion thereof at any time.

In addition, as mentioned in our fourth quarter earnings release, the overhang effect from those expiring options has been reduced substantially by about 80% with only about 20% or 600,000 shares remaining unexercised.

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

Thank you, Howard. Today's market climate of price; is a place where Supermicro's strengths and strategies, we have already witnessed a market shift to an emphasis of cost performance and the application optimization that our competitors are unable to fulfill.

Today more than ever customers are considering Supermicro because they recognize that we can deliver specialized service solutions that are optimized for their applications while offering the best TSO for them. It is our strategy to build on this momentum, our broader customer awareness of Supermicro's capabilities.

We will continue to expand our product line with first to market technology that provides solutions for our customers' dynamic needs.

To summarize, I believe we are well-positioned to outperform our competitors in today's market. I will now turn the call back to Perry.

Operator, at this time we're ready for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS)

We'll take our first question from Jeff Fidaro with Merrill Lynch.

Great, thank you. Charles, I was wondering if you can talk to us a little bit about the outlook and the IT spending characteristics that you've seen recently. If you look past in a few past downturns that you've gone through already, have you seen any different behavior in you end customers and what is different this time?

Yes, Jeff; thank for the question. We can see some slow down, a little bit slowdown in the market. Some customers are more price sensitive now and they are more picky now, picky for kind of a lower power consumption, for base TSO; so we can see some shifts that are happening. However, we are happy to see this because we are really strong in application optimized, as you know. So we continue to satisfy most of the customer in data center and in other applications.

So although the market may continue to keep soft for awhile, with our strong product lines we have a (inaudible) to come with it.

If I can ask just one quick follow up; if you look at the guidance for the 2% to 10% type revenue growth next quarter, can you talk a little bit about what new products that includes.

As you know, traditionally Intel introduced big product lines this summer like in 2002, 2004 and 2006. They all introduced new product lines in the summertime timeframe. However, this time Nehalem, a QPI technology; they shifted announcement through spring '09. So this is one effect on our December quarter may not grow that much as before. However the growth will shift to a couple few quarters later. That growth advantage is still there. Again, whenever Intel has a new technology, clearly we have much better growth in the following couple quarters.

Any update on the itanium?

Itanium again its main product also may be next summer-- so it won't affect our kind of financial performance for this year; but next year definitely.

Okay. Thank you for your time, Charles.

Thank you.

We'll go next to Alex Kurtz with Merriman, Curhan & Ford.

Yes, thanks guys. Can you hear me okay?

Yes.

Just to follow up on that QPI question; I was always under the impression that that was really going to help you guys maybe in the March and June quarter. Can you just repeat again Charles about what you were saying about maybe a push out in QPI regarding your internal forecasts?

Yes. I mean exactly what I just mentioned this time Intel basically were introduced, officially introduced Nehalem in spring quarter and I personally believe will be in later spring. That means help to us will be happening some in March, but most in the June quarter and then maybe in the September quarter of 2009.

Okay. And Howard, can you just-- this is my follow up here-- could you just talk about gross margin a little bit? What was the inventory reserve and was there a specific product mix that helped grow the gross margin sequentially? Thank you.

The effect of the provision Alex, to answer your question; this quarter we had about 0.4% of the gross margin was affected by provision negatively impacted. And that's similar to what we had last quarter which was 0.1%. So if you see that, we add about a 3% negative effect on our gross margins from our reserve.

Right. And then what about just the overall growth in margin; what helped it this quarter? It was only up I guess 20 basis points.

Right. So in fact again, we continue to sell our products like UIO and 1U Twin very well, so those are obviously helping us with our margin and blade server is growing too.

Has Superblade reached like the 5% of sales yet?

Not yet. It's still growing.

Alright; I'll follow up later. Thank you.

We'll go next to Glenn Hanus with Needham and Company.

Good afternoon, following up on the financial question; you've got your non-GAAP operating margin up over 9% and sequentially really took down operating expenses I guess about $1.5 million or pretty substantially. Could you talk a little bit more about how you curtailed operating expenses so much and your operating expense outlook going forward?

Yes I think Glenn last quarter we were doing the finalization of our SOX work and we passed SOX last quarter and the end of our fiscal year. And that resulted in a number of consulting expenses to be incurred in the fourth quarter which didn't follow on into this quarter. So that was a primary portion of that reduction.

The other factor is because we spent a lot of manpower in developing operating server and about six months ago pretty much we are already finished with most operational design. So now we able to use those engineering resources to take care of some OEM accounts and for those OEM accounts we have design charges income.

So should we look at the operating expense base you have today or you just reported as kind of the base level that we should think of going forward, plus just very modest growth?

I think you'll see some growth going forward, Glenn.

But fairly modest?

Yes. I mean it's not going to-- I think you've see the Q4 that had about a good portion of soft expenses rotated into it; I don't think you'll see that. But you'll see again some additional headcount that we took in this quarter and again some just minor expenses going up into the next quarter.

Could you talk about your headcount; where your headcount is at and what your plans are for headcount additions over the next couple of quarters?

Yes, indeed; we are a technology leader, so it depends on the economic conditions. If the market trend is still keeping soft, then our headcount increase may be more limited, maybe 5% or 10% growth for the next three quarters. But once the economy comes back and becomes much better, I guess we will hire and generate headcount aggressively. It depends on the market condition.

And just specifically-- we grew about 24 heads during the quarter over quarter. We're about at 824 heads at the end of this past quarter. And you'll see this again as we talked back a couple of quarters ago we ramped up our R&D and built the infrastructure to help us with all the new product launches. If you look over the last couple of quarters, you've seen that that's kind of flattened out and so our expenses have flattened out.

Thank you.

We'll go next to John Roth with Argent Capital.

Hi Charles and Howard. I'm sorry, could you just repeat for me again what you said regarding the adjustment in inventory in the gross margin this quarter.

Sure the reserve for inventories this quarter was 0.4% of gross sales, that's compared to about 0.1% in the prior quarter.

0.4% of sales, so that's roughly--$600,000; and you said it compared to 0.1% in the prior quarter. But in the prior quarter didn't you have as well a positive impact on the sale of inventory that was previously reserved?

Yes we did. And so as we add new reserve and then we sell off some of those previously reserved items, the net effect last quarter was 0.1% of additional reserve or about $183,000.

Okay, that was net; got you. Again on the tax rate; I think what I heard you say is that you expect it for Q2, the tax rate to kind of revert back to that 32% level; is that correct?

That's correct. With the passage of the (inaudible) R&D credit was reinstated so we have a bit of a catch up during this quarter and so our tax rate if you look back historically, when the catch up tax was back in fiscal year 2007, we had about a 30.7% tax rate, non-GAAP in that period. So expect something similar this quarter.

And then presumably looking forward beyond Q2, I know you're not giving any specific guidance but sort of order of magnitude-- there wouldn't be any-- Q2 should be a reasonable proxy going forward since that's been reinstated. Is that a fair assumption?

Well, there is some catch up involved in the quarter because again you don't report R&D credits in prior quarters until the tax R&D credit was reinstated so this Q2 will be a catch up quarter. And then if you look back historically, you'll see that things level off after that.

Last question for you; has the Board given any additional thoughts to potential share repurchase, given the strength of your balance sheet and cash flow you're generating?

Sorry John. Can you speak up just a little bit?

Yes. I'm sorry. Has the Board given any sort of additional thought to potential share repurchase given the strength of your balance sheet and the amount of cash that you're generating?

John, we've always taken a look at that and we'll always discuss it as we do it. We have not implemented anything at this point.

Okay. I mean I was just certainly where-- where you're trading now and considering the fact that you seem to be faring better than a lot of folks and actually growing the business through what's looking to be a pretty ugly downturn here; I think the stock is at a level where it's really pretty much of a layup that you guys could get out there and repurchase some shares. I think if you could look out in the12 to 18 months it would heavily accretive to your earnings per share and a good use of capital.

I'm certainly not advocating something aggressive and foolish, but I think something modest would be in the best interest of shareholders. So for what it's worth, those are my thoughts.

We appreciate the comments, John.

Okay. Thank you, that's all I have.

We'll go next to Manoj Nadkarni with ChipInvestor Group.

Hi, good afternoon. You had nice cash flow from operations in the September quarter. What are your expectations for free cash flow in the third quarter? Or at current revenue levels, what do you see as cash flow from operations?

Indeed we have been a profitable company in the last 15 years, no exception. So next quarter basically still quite positive; Howard, do you have more details?

Yes. I think built on that, again if you take a look back over the last number of years you'll find that we have positive free cash flow in almost every quarter and the only impact with that would be an acquisition of a building time to time. So again if you look back over the last couple of years, for sure, you'll see that we've had positive cash flow.

Okay. But it would vary from quarter to quarter I would imagine.

It can vary some but again, it's based upon -- our guidance right now we've got $140 million to $150 million in revenues and $0.18 to $0.22 per share EPS so again, that'll produce results.

Okay, okay. And I have a follow-up question. Can you guys give some color on what you saw in the September quarter; what segments product-wise, geography-wise you saw growth and were there any soft spots?

Yes. I think again with the broadness of the effect of the space; we have a very diverse product line, but even this we saw not one sector being impacted more than others. I think we saw a kind of fairly broad effect from this but again on some of our diverse customer base having no customers over 10% of our revenues and some geographical diversity helped us in those situations. But again, it was fairly widespread. I can't pinpoint one sector versus another sector that got hit particularly hard.

Okay, alright. Thank you.

We seen in the last many years, including last quarter; we continue to expand product scope, product line; so the same direction will continue for the next many quarter, next many years, especially in the embedded area.

We'll now take a follow-up question from Alex Kurtz.

Hey guys, I just had some data points that I wanted to ask here. Howard, the OEM contribution, the one that was I think around-- I think you had given us a 44% number last quarter. What was that percentage this quarter?

Backing out the OEM answer, the distributer-reseller; maybe it's easier to give that. I gave that on the conference call. It was 62.6%, so that makes this quarter 37.4%.

Okay, for OEM and end customer?

OEM and end customer; that's correct.

Okay, great. And it looks like the Internet vertical was down this quarter. It was both on a percentage and an absolute basis. Was the weakness in the quarter seen for maybe a push out at one of these larger data centers?

I think when we compete in data centers; again we talk about it being fairly projected-related. So last quarter we were up to about 15% and it was based on some projects that we had won. This quarter, those project weren't there. We compete on features and technologies so as these projects come out from the Internet data center market, we have the best technology there to supply a (inaudible) when those project arrive. And this particular quarter that project that we got last quarter didn't arrive.

Okay, so projects are quarter to quarter so you don't have the multiple quarter contracts it sounds like.

Yes. They are on a project-by-project basis.

Okay. And just again on the cash flow question; obviously some of your best cash flow growth in Company history; what do you expect to see maybe next quarter? And I'm sorry if that question has already been asked.

I think if you take a look at our guidance again, we had $140 million to $150 million and an EPS of $0.18 to $0.22; I think you'll see that's fairly similar to this quarter.

Right. So just looking at working capital gains you had in the quarter, do you think you'll be able to maintain that level?

I think there's nothing that we've indicated that's going to be different.

Okay. Alright, thank you very much.

We'll go next once again to John Roth with Argent Capital.

I'm sorry guys, just one quick follow up. What was the percentage of revenue attributable to data center business this quarter?

The Internet data center was 7.5%, John.

Okay, great. Thanks very much.

And another follow-up from Glenn Hanus.

Could you talk about-- you said in your commentary on the improvement in gross margin beneficial pricing offset by higher freight; so could you talk about-- are you referring to some component pricing that was better? Just talk about the gross margin and the sustainability of gross margins at current levels.

Yes, Glenn. I think as we've talked about, we-- for example memory hard disk drives and those kinds. We started building partnerships about a year and a half ago and those partnerships have increased and we've gotten closer to those vendors as we've grown our volume and our business. So again, some of the positive benefits from growing that relationship is a reduction in our overall cost.

Plus our overall revenue-- they are growing, consistently growing. So those kinds of economies of scales also are consistently helping us.

But I'm offsetting-- how is the pricing to your customers in the competitive landscape where it was pricing more difficult or more challenging out there? Or-- obviously your gross margins came in fine so was there some offsetting pressures that you saw this quarter that weren't there in the past or how does that look?

In [the embedded] area, you are pretty right. I mean last quarter we saw already more (inaudible) in data center customers. However, we have most customers in every application, especially in embedded and kind of high-performance computing. Our overall margin has been quite stable.

Okay, so a little tougher in the data centers but the rest of the business is pretty much unchanged?

Yes. Because we continue to grow our product scope, especially in the embedded area; and because of our building block solution. You know, it's much easier for us to cover [why the] industry compares with other competitors.

Okay. Could you reinforce a little bit why in a slower economy, application optimized is more relevant and you should be somewhat insulated from the macro environment?

You know that we mentioned a couple of times ago when economics are tough, everyone every end user watches their budget, more picky, more carefully. And when that happens, they're searching for (inaudible) partners instead of continuing doing business with their older partners. So because we are a new company, relatively, compared with our competitors; so when customers become more picky, more aggressively looking for (inaudible) solutions, base TSO; we got a better chance; especially in the high efficiency computing performance per watt, and performance per barrel. I would obviously [have faced] in the market today.

And you said in your slide there addressing new markets and industries that need optimized. So what are the new markets and new industries that need optimized that you're looking at going forward?

A couple areas; for example, even gaming-- gaming industry before we were not there. But now we've found more and more picky even gaming customers so they want not just performance, expensive features; but also surprising us, kind of high-efficiency computing.

And (inaudible) for example, we found that people right now are really picky for power consumption. Lots of time even 1% or 2% better power consumption; made in (inaudible) today. We did not see this a long time ago.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll take a follow up from Manoj Nadkarni.

Hi. You spoke about timeline for revenues coming from systems based on new Intel processors. Can you tell us briefly what's happening with systems based on new AMD processors?

Yes. AMD we'll have a Shanghai product line, a visual launch next month. And we here have at least 10 different server (inaudible) and about 20 different servers [Q] based on AMD processors. We're already for Shanghai processors. So we are kind of completely ready for Shanghai processors.

Okay. And revenue ramp for systems based on that platform; will that be similar with like one quarter, two quarter GAAP and then ramp up?

This time it will ramp up earlier because you see that this time Shanghai basically almost like all comparables with their [pass alone] on CPU, not 100% , but almost 100% in fact in all comparables. So we just fine tune BOM and fine tune some system configuration. So this time it's relatively much easier and much quicker.

Okay. Alright, thank you.

Thank you.

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 for joining us today and we're looking forward to talking to you again at the end of this quarter. Thank you, everyone; have a great day.

That does conclude today's program. We thank you for attending and have a great day.