超微電腦 (SMCI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro Computer Incorporated Second 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 has been made available to participants which can be accessed in a download 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, security 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, [January 28, 2009]. A replay of the call will be accessible until midnight, [February 13th], by dialing 1-888-203-1112 and entering the conference ID number 4598285. International callers should dial 1-719-457-0820.

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. Mr. Hayes, please go ahead, sir.

Good afternoon and thank you for attending Supermicro's Conference Call on Financial Results for the Second Quarter Fiscal Year 2009, which ended December 31, 2008.

I'd like to make a quick remark with regard to the replay of the call. It will be accessible until Midnight February 13th.

The Company will be presenting and meeting with investors and analysts at the Thomas Weisel Technology Conference on February 9th in San Francisco. An audio webcast of our presentation will be available on our website www.supermicro.com in the Investor Relations section.

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. 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 uncertainty; 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.

Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide three of this presentation or to our press release published earlier today.

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

Thank you Perry and good afternoon, everyone. Please turn to slide four.

Supermicro's revenue in the second quarter was $128.6 million or 6.1% lower than last year. Non-GAAP net income was $6.7 million or 21.4% lower compared to last year. Supermicro's non-GAAP earnings per share were $0.17 per diluted share, compared to $0.22 last year.

Please turn to slide five.

Given the steep decline of economic conditions in recent quarters, our industry struggled as IT spending was reduced; as a result, our revenue was not as strong as we would like to have had. Nevertheless, as our results indicate, we managed to gain market share against our competitors. We are confident about Supermicro's future sales as it has traditionally performed strongly in soft market conditions.

We see these difficult times as an opportunity to demonstrate our ability to create truly application-optimized solutions. They are the best value for performance solutions in the market today. Our market share gain proved that we are getting the attention of careful IT managers who have to operate under tight budgets. We have shown that our fundamentals are strong and our product strategy is succeeding.

Moreover, our margins are healthy. Our cost structure is well controlled and we are continuing to be profitable.

Please turn to slide six.

During the quarter, our stock price was adversely affected by the financial meltdown on Wall Street. As a result, the Board of Directors took action to support our stock for the benefit of our shareholders. Utilizing the strong cash position of the Company, the Board authorized a buyback program that enabled the Company to purchase up to 2 million shares of our common stock.

The buyback program will expire in June of this year. Our CFO, Howard Hideshima, will provide you with an update on our results on our buyback in a few minutes.

There were many successes for Supermicro during the quarter and I would like to share some of them with you now. Please turn to slide seven.

During the quarter, we were acknowledged in CI's annual survey as the number-one x86 server vendor in the Channel, as published in the November 24th issue of CI in 2008 Channel Affinity Index, based on the result of 8,000 surveyed responses conducted with solution providers. It ranked Supermicro as the top x86 server vendor. We will continue to innovate and this is a way to increase our channel opportunity to efficiently compete in the marketplace.

This collaboration between Supermicro, our channel partners and our customers worldwide, is one of the key foundations in the strength of our Company.

Another recognition we received was from the Government Computer News where they rate Supermicro's SuperServer 6015W the overall best product of 2008. GCN described our product as a truly SuperServer and truly the best of the best for that year. This award continues a trend that we have seen when independent groups compare our product to competitors based on power efficiency, server management performance and value.

Our engineering capability and company infrastructure enabled us to launch many new products along with technology innovations, as well as expanded our global market we serve. In the recent quarter, we launched the addition of the world's most affordable personal super computer; featuring our OfficeBlade solution. This product line is ideal for scientists and researchers in life science, biotech, physics, chemistry and similar fetes of engineering and science.

Moreover, we have launched our 5046A all-station system and a highly affordable 5035L cost-effective server storage. They are truly optimized for small office and home, a core SOHO application. Most of these single-socket systems feature 25 to 27 dB whisper-quiet operation and delivers superior energy efficiency that SOHO customers demand.

We also had seven key wins during the quarter which highlights Supermicro's continual technology leadership in computing density, high-memory capacity and performance optimization. For example, our 1U Twin solution was recently selected for a prestigious Hyperion Project at Lawrence Livermore National Lab.

Now, let me talk about some of our main product innovations that will be released in the coming quarters. Please turn to slide eight.

In particular, we are gearing up for an important launch of Intel's Nehalem processor technology which is one of the most significant technology transitions in years. We are ready to launch the strongest and broadest Nehalem product line with a couple of our brand-name system architecture innovations.

We are planning to introduce over 50 SKUs of server and all-station boards, alongside more than 30 optimized chassis power prime models at the launch, which can be easily viewed into hundreds of application optimized system models. Thank you to our server (inaudible) solution designs.

Building on the success of 1U Twin, by continuing our engineering innovation, we had created an even better product with higher performance per watt and per dollar; plus the highest computing density. This new product named 2U Twin2, will be launched in the current quarter. This new generation of double density product, will support full CP nodes in the 2U size enclosure with 93% industry-leading high efficiency power and cooling air (inaudible) technology, targeting the HPC and datacenter market.

We also introduced our SOHO product line that is just (inaudible) and we are seeing very promising demand. In addition, we will also launch high-speed connectivity products such as 10 gigabit switch and the QDR Infiniband solution. Moreover, our (inaudible) storage subsystem is planned to launch in this summer.

And this has been the advantage of Supermicro, that we can react quickly to the changing market, deploying new technology and expand our product offerings, which allows us to continue our technology leadership. Based on this strong product line, I'm confident that our business is well-positioned for continual 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 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 and is in supplemental detail in the slide presentation accompanying this conference call.

Let me begin with the review of the second quarter income statement. Please turn to slide number nine.

Revenue was $128.6 million, down 6.1% from the same quarter a year ago and down 10.8% sequentially. Revenues for the six-month period was up [7%] over the same six-month period a year ago.

Slide number 10.

The decrease in revenues was widespread among our customer base. As the financial crisis, which started in September, affected all parts of the economy. The proportion of revenue from server systems was 38.7% of total revenue, which was a decrease from 42.4% a year ago and 41% last quarter. ASP per server was comparable to the last quarter, at about $1300 per unit. Decrease in server product was primarily due to a decrease in shipments of our 6000 series and OEM-bundled server.

During the quarter, components decreased due to a decrease in chassis; which resulted in less pull through of motherboard. For the six month period, components and server revenues were up 8.5% and 4.8% respectively, for the same six months a year ago.

We continue to maintain a diverse revenue base, with none of our over 400 customers making up more than 10% of our net sales in the second quarter. Furthermore, 65.1% of our revenues came from the US, and 66.5% from our distributors and retailers. Internet datacenter revenue was 7.9%, which is comparable with the prior quarter of 7.5%.

Slide 11 and 12.

Gross profit was $24.2 million, down 11.5% from $27.4 million in the same quarter last year; and down 13.4% from $28 million sequentially.

On a percentage basis, gross margin was 18.9%, down from 20% a year ago; and down from 19.4% sequentially.

Price changes from Ablecom resulted in a 0 basis points change to [gross profit] in the quarter, with total purchases representing approximately 22.8% of total of total cost of goods sold, which is down from 28% a year ago and 27.3% sequentially.

The year-over-year decrease in gross margins resulted from lower margins in motherboards and accessory products, offset in part by higher margins in server and chassis. In addition, our inventory reserve was lower year over year, due to the emphasis on managing our inventory.

The sequential decrease in gross margins resulted from lower margins in server products and accessory products, offset by higher margins of motherboards and chassis and lower inventory reserves as noted above.

Slide 13.

Operating expenses were $15.6 million, up from $14.2 million in the same quarter a year ago; and up from $14.9 million sequentially. As a percentage of revenue, operating expenses was 12.2%, up from 10.4% year over year, and up 10.4% sequentially.

The year-over-year increase in operating expenses resulted from higher payroll and related fringe benefits, primarily related to our R&D headcount which remains a competitive advantage for the Company, and a priority. Nonetheless, headcount additions and expenses are leveling out.

Sales and marketing expenses were controlled during the second quarter, as some sales headcount growth and consulting expenses was offset by lower variable compensation tied to sales volume.

G&A expenses were flat year over year due to lower consulting expenses related to SOX and taxes, offset by slightly higher payroll costs.

Sequentially, R&D expenses were up, primarily due to lower NRE of approximately $415,000 and an AR reserve of $360,000 recorded in G&A.

Operating profit was $8.6 million or 6.7% of revenue, down $4.6 million or 34.6% from $13.2 million a year ago; and down $4.4 million or 34% sequentially.

Net income was $6.7 million or 5.2% of revenue, down $1.8 million or 21.4% from $8.6 million a year ago; and down $1.6 million or 19.2% from $8.3 million sequentially.

Our non-GAAP fully diluted EPS was $0.17 per share, down $0.05 from $0.22 per share a year ago; and down $0.04 from $0.21 per share sequentially.

The number of fully diluted shares used in the second quarter was 39,233,814.

The tax rate for the second quarter, on a non-GAAP basis, was 20.8%, compared to 36% a year ago, and 36.1% sequentially. The R&D credit was reinstated retroactively during the second quarter of fiscal '09 and there was a one-time catch up for this credit during the quarter. We expect the effective tax rate to be approximately 33%, which is similar to fiscal year 2008 when the credit was reinstated.

Turning to the balance sheet, on a sequential basis; slide 14.

Cash and cash equivalents from short-term and long-term investments were $74.9 million, down $5 million from $79.9 million in the prior quarter.

In the second quarter, free cash flow was a negative $3.8 million and the net change in cash was a negative $4.5 million.

For the six-month period, free cash flow was a positive $7.5 million, and the net change in cash was a positive $8.8 million.

Slide 15.

Accounts receivable decreased by $6.6 million to $39.6 million and DSOs was 31 days which was the same as the prior quarter. Inventory decreased by $11.7 million to $89.1 million, with days in inventory increasing by 10 days to 84 days.

While the Company made significant progress in reducing inventory in the quarter, inventory days increased due to the slow sales volume.

Accounts payable decreased by $21.3 million to $65.6 million; and the days payable outstanding increasing by one day to 67. Overall cash cycle were 48 days, an increase of 9 days from 39 days in the prior quarter.

Free cash flow for the quarter then was a negative $3.8 million. Cash flow was impacted by the significant decrease in our accounts payable during the quarter of $20.9 million, partially offset by improvements in our inventory and receivables.

As Charles stated earlier, in the second fiscal quarter, Supermicro's Board of Directors authorized a buyback program. During the quarter, we spent approximately $1.8 million to repurchase 390,000 shares of common stock.

Now for a few comments on our outlook; current uncertainty in the global economic conditions make it more difficult to predict customer purchasing decisions and Supermicro's business outlook for the third quarter reflects the uncertainty in the demand cycle and timing of sale.

The Company currently expects net sales for the quarter ending March 31, 2009 in a range of $115 million to $125 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.11 to $0.14 per share for the 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.

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

Thank you, Howard. Clearly we have several quarters of challenging economic conditions ahead of us, like everyone else. However, Supermicro's fundamentals are strong and our product strategy is viewed to succeed for today's market. Our products represent the best value proposition in the market today. We're measured by performance per dollar, performance per watt. We are winning important new clients and are gaining market share as a sign of our ability to perform in a tough market and foster our long-term success.

In summary, we believe we are well-positioned to outperform our competitors in today's market. In particular, we are well prepared for our upcoming significant launch of Nehalem products.

I will now turn the call back to Perry. Perry-?

Operator, at this time we are ready for questions.

(Operator Instructions). And your first question will come from Alex Kurtz with Merriman.

Thanks, guys. Can you hear me okay?

Yes.

Thanks. So what steps are you guys taking to improve visibility with your channel partners so investors can have some increased confidence in the guidance you just gave? I know it's a challenging market there right now-- but are you guys taking any visible--actionable steps to inspect your pipeline more or do something so you feel that investors can get behind the guidance that you just gave?

Alex, this is Howard. Yes, we are increasing our efforts to get closer to our partners and so we're working even harder with our partners to help them during these challenging times, and they'll understand exactly what the requirements are going to be.

Howard, does that mean your channel team is doing more reviews every week or doing more inspections in the pipeline? Is there something different happening?

Yes. I mean we have regular sales meetings almost twice a week, so we have very good feedback from customers on the market; both the channel and the OEM customers.

Okay. And then Charles, can you put a stake in the ground and sort of give us a better sense of when you guys start expecting to ship Nehalem for revenue in the next couple of quarters? Like can you give us a month or a couple of months when you start to expect the ramp to happen?

Okay. As you may know, Intel official launch will be at the end of March. But traditionally, because our time to market-- so usually we are able to service [seating] solution or some really special deal-- so this year is a similar opportunity. So we will ship something this quarter for sure and (inaudible) date this quarter, or 30 April for sure; that we'll start to ship as regular in volume.

So other than Nehalem, we also have some new products lines that will support Nehalem. There's also some [back-order] support of current product; so a couple of important products will also be starting to ship in about February.

And just a last question Howard; just on what Charles was just saying-- how should we think about gross margin between March and June as Nehalem starts to ramp? And thanks, again.

I think Alex, the best way to think about it again--the economic conditions are tough out there. Traditionally it's a slower seasonal quarter. However, if you go back in time when we introduced the last introduction with Intel, we did see a gross margin boost because of the newer products. So again, those factors all affect what our ultimate gross margin will be.

Okay, thank you.

And indeed this quarter we also have some chance to ship some Itanium product line.

And from Needham and Company, we'll hear from Glenn Hanus.

Thanks. Just following up on the gross margin a little more; it sounds like you have some offsetting factors with lower volume but then there's sort of Nehalem coming on. I'm just wondering if you can talk a little bit more about the puts and takes on gross margin and to what extent do lower volumes tend to hurt your margins that could offset the Nehalem coming on?

Yeah, Glenn, this is Howard. Lower volumes obviously affect some of our overhead consumption rates but they're not very large--in the tenths of percent there; so that would be the impact, purely from a lower margin-- or lower volume perspective. And then as I just said to Alex, we've got some counter availing forces with regards to release of new products that help our margins.

Okay. Any other factors there with gross margins we should think about?

Nothing that I haven't mentioned already, I don't think.

Okay. How about-- maybe you just talk about operating expenses here over the next few quarters-- sort of flattish or up a little, down a little-- any guidance there please?

Basically, with this economic downturn, indeed we have better control of our headcount, right? Last year we grew [47%] in engineering headcounts and that's why today we have a very strong engineering team. That's why we're able to support a more OEM customer.

However, given the poor economic conditions, we have pretty much a freeze on headcount hiring. And also we have better control of overtime salary for production and operation departments. So believe we will save some money from kind of tighter headcount control, as well as reducing our expense for daily operation and some other important benefits. So I believe we are prepared for this downturn.

Okay.

Let me add to that a little bit again; as I mentioned in the call, we had some-- some of our reductions we had bad debt expense of about $360,000, and we had NRE shortfall about $400,000-- if we didn't have those things actually our expenses from OpEx would be flat quarterly, comparably speaking.

Okay. Any progress report on how you guys are doing with-- in the blade market?

Blades, we see the continued steady growth, although the tough market has some impact, but here we see a clear improvement; it's not fast, but steadily growing.

Okay. Thank you.

Thank you.

(Operator Instructions). And your next question will come from John Roth with Argent Capital.

Hi. Good afternoon, guys. Howard, could you just repeat your comments about your tax rate expectations going forward?

Sure, John. I mentioned on the call that we do expect about a 33% tax rate going forward and the lower tax rate from a historical perspective of 36.6% is due to the reinstatement of the R&D credit. We'll get a credit benefit for that all throughout the rest of this year.

Okay, great. And lastly, what was the size or relative scale of the inventory adjustment to gross margin this quarter?

About a positive 0.2%.

Positive 0.2%-- okay, thank you.

(Operator Instructions). And we'll take a follow-up question from Alex Kurtz.

Yes, just to clarify on the OpEx question that Glenn was asking; do you expect a sequential decrease, Howard, in the OpEx line for March?

As I mentioned, if I didn't see the charge and if we return back to that NR rate; that basically we would have been flat with Q1, as far as our OpEx expenses.

But then thinking over the next couple of quarters; you're going to try to maintain that OpEx line around where you were in September?

I think there are going to be puts and takes to it, going forward; but as Charles mentioned, we've got programs where we're reviewing basically all of our various costs, working with our vendors to manage ourselves during this economic time.

Okay. And just a question on the accounts payable change quarter over quarter; can you just give us a little bit of insight there?

Sure. With regards to-- as we built up inventory last quarter, again timing of the accounts payable comes in various points in the quarter, so again that decrease occurred due to the prior buys of inventory. And then as we looked to manage our inventory as we started seeing the headwinds, again those APs became due. So again we're getting our handle around it. You saw some of the benefits of us reducing our overall inventory during the quarter and we expect to continue to manage it that way.

And just remind me Howard; do you recognize on ship in or ship out of the channel?

We recognize shipped in to the channel.

So what's your sense right now about inventory levels among your channel partners when you're talking to them? Is there sort of a glut coming or do they feel like they've managed it pretty well over the last couple of months?

I think, as you know, our products are fairly unique or application optimized, so they keep very low inventories in the channel.

Okay. Thank you, again.

And we do have a follow up from Glenn Hanus of Needham and Company.

Wondering- in this more challenging environment, whether you're seeing greater pricing pressures either from your customers directly or as a result of competitive activity.

Yes, during that tough market for sure, competitors try to be more aggressive in pricing. However, we feel we win by performance, by application optimizing. So we have not really had to lower our price very significantly. However, for some product lines to grow market share, (inaudible) we will try.

I'm sorry. I missed the last two sentences.

I mean for certain market segments to grow our market share we will try to lower our price a little bit. But overall, our profit should be in a very healthy condition.

Thank you.

And we have no further questions. I would like to turn the conference back over to Mr. Liang for any additional or closing remarks.

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.

Thank you, ladies and gentlemen. That concludes the Supermicro Incorporated Second Quarter and Fiscal Year 2009 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.