超微電腦 (SMCI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Third 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 is 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, 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, April 29, 2009. A replay of the call will be accessible until midnight, May 13, by dialing 888-203-1112 and entering the conference ID number of 4711643. International callers should dial 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.

Now at this time I'd like to turn the conference over to Mr. Hayes. Please go ahead.

Good afternoon, and thank you for attending Super Micro's conference call on financial results for the third quarter fiscal year 2009, which ended March 31, 2009. Before we begin, I'd like to advise you of upcoming investor conferences where Super Micro will be presenting.

The Company will be presenting and meeting with investors and analysts at the Kaufman Brothers Cloud Computing Conference on May 27 in New York and at the UBS Global Technology and Services Conference on June 10 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. 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 2. 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 Super Micro; 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 would 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.

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 3 of this presentation or to our press release published earlier today.

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

Thank you, Perry, and good afternoon, everyone. Please turn to Slide 4. Super Micro's revenue in the third quarter was $109.5 million, or 19.9% lower than last year. Non-GAAP net income was $2.4 million, or 59.2% lower compared to last year. Super Micro's non-GAAP earnings per share was $0.06 per diluted share compared to $0.15 last year. The third quarter was seriously influenced by the global economic recession, during which IT spending declined sharply. In addition, the quarter was marked as the preparation of Intel's Nehalem CPU launch. For that reason, IT managers have been waiting for the new technology before spending their budgets. And this had an impact throughout our whole quarter.

While it is difficult during this recession to accurately forecast when the bottom may be reached, however, we believe that because of the technology transition that is underway, and because of our strong new product line, the worst should be behind us.

I would like to share with you a number of innovative architecture and new product lines which will place Super Micro in a strong position for the coming quarters. First, the new Intel Nehalem (inaudible) launch. Please turn to slide 5. As we have said previously, Super Micro has been leading ahead for the Nehalem solution, which occurred on March 30. This is one or the most significant introduction of CPU technology impacting server hardware that we have not seen in the past 2.5 years. We are excited about our new technology, and we expect the advantage of Nehalem in terms of memory and IO performance, power efficiency, and processing speed will be strong, compelling reasons for IT managers to adopt our Nehalem solution.

As we have said in the past, Super Micro has been made available with the broadest product line in the industry for the Nehalem launch. At the time of the launch, we had approximately 80 SKU of motherboard products, 30-plus chassis models, and more than (inaudible) server SKU available. Having this quantity of (inaudible) available at the launch allows us to showcase our special uniqueness in the industry. No other company can offer the number of application optimized server solutions as can Super Micro.

We already have over hundreds of application optimized solutions already ready, and the number is growing. By optimized application solutions, we mean that we can offer customization. For example, more IO and storage memory, greater memory capacity, higher efficiency, or extremely power-saving designs in a cost-optimized fashion. These application optimized solution was developed to attract most of the market, including data center, enterprise, scientific and engineering, medical, and high-performance computing. Our past experience with technology transition of Intel CPUs demonstrates that our preparation has been rewarded with larger growth in our business.

One of the hallmarks of Super Micro has been our technology development, and our time to market. We are well prepared for this launch, and we expect our new products will do well in this technology transition.

Second, our 2U Twin-squared product line. Please turn to Slide 6. We have launched our 2U Twin-squared product line just recently and just started shipping in volume. During the big show, our 2U Twin-squared has been recognized as the breakthrough product because of the four independent hot-pluggable DP nodes. The 2U Twin-squared operates on a high-efficiency power supply with optional 1+1 redundancy that is running at a 93%-plus power efficiency. It's established the highest performance per watt that are over 375 gigaFLOPs per kilowatt, which gives up 25% net power savings over the industry's 1U servers.

Flexibility and density are optimized in our unique and patented technology in aimed at high-performance computing clients, as well as data centers. We have been a pioneer in the twin architecture technology two years ago, and now the 2U Twin-squared raises the bar to a new level because it provides the best performance per watt, per dollar, and per square foot, and yet easy to maintain.

Third, our GPU optimized workstation and server solutions. Slide 7, please. We had recently developed a GPU or graphic optimized architecture to address the needs of high-performance computing and visualization applications. These applications are typically used in the field of oil and gas exploration, research labs, defense and medical.

This quarter, we will launch a GPU optimized server workstation solution that is capable of supporting up to two ultra-high-end (inaudible) in the 2U system, or up to four high-end (inaudible) in a 4U Rackmount power servers. When combined with Nehalem (inaudible) for the CPUs in a BP node configuration, this performance are the most powerful computer system in the whole world.

As we have said, we are a technology company at our core, and we invest heavily in research and development to stay ahead of our competition. Recently, we also have been working on another exciting new product that will be launched in upcoming quarters. This new product will fully enhance our server product line and make for more total solutions from Super Micro. Next slide.

Switch products. We just started shipping our 24-port and 48-port (inaudible) and 10G switch, and also our giga and 10G switch and also our 10G switch, as well as 40G (inaudible) switch. (inaudible) storage (inaudible) space. We feature, that will feature 100% hot-swappable and redundant storage components to ensure maximum data availability. We worked our sampling to OEMs (inaudible) this quarter. Again, that's the SBB or we call it Super SBB.

And third, embedded products. We will extend our penetration of the cost-effective server applications with the Intel Atom-based design. AMD Istanbul. We will start ship our AMD Istanbul-based product also in this quarter.

In summary, our R&D efforts have provided us the best of product lines in the industry. As you can see from our financial report, we have cut spending in other areas to fund our R&D investment. We believe that our focus on technological innovation clearly differentiates Super Micro from the competition, and is the foundation of our success. It is our long-term strategy to continue to invest in developing promising technology and innovation products that promote market share gain, brand awareness, and a strong ROI performance.

History has shown that during market upheavals, companies that continue to focus on R&D have a better chance of future when markets recover. Now, we have a strong new lineup of products that give us a great opportunity to increase our market share, as well as extend our product line to new markets. We believe that our strategy of being the leader in server technology innovation will be rewarded to our shareholders.

With that, let me hand it over to our CFO, Howard Hideshima, for operational details. 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 will reflect adjustments that 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 details in the slide presentation accompanying this conference call.

Let me begin with a review of the third quarter income statement. Please turn to Slide 9. Revenue was $109.5 million, down 19.9% from the same quarter a year ago, and down 14.8% sequentially. Revenue for the nine-month period was down 2.4% from the same nine-month period a year ago. Slide 10.

The decrease in revenue was fairly widespread among our customer base, which we believe was caused by the global economic downturn and the effect it has had on IT spending, as well as a technology transition. The proportion of revenue from server systems was 39% of total revenue, which was an increase from 35% a year ago and down from 41% last quarter. ASP per server was down from about $1,300 per unit last quarter to about $1,100 per unit. The decrease in server products was primarily due to a decrease in shipments of our 6000 series.

During the quarter, components decreased due to decreases in chassis, which resulted in less pull-through of server board. For the nine-month period, components and server revenues were down 3.9% and 0.1%, respectively, over the same nine 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 third quarter. Furthermore, 59.8% of our revenues came from the US, and 65.9% from our distributors and reseller accounts. Internet data center revenue was 12.1%, which is an increase from the prior quarter of 7.9%.

Slides 11 and 12. Gross profit was $16.5 million, down 34% from $25 million in the same quarter last year, and down 32% from $24.2 million sequentially. On a percentage basis, gross margin was 15%, down from 18.2% a year ago, and down from 18.9% sequentially. Price changes from Ablecom resulted in a negative two-basis-point change to gross profits in the quarter, with total purchases representing approximately 18.1% of total cost of goods sold, which is down from 27.4% a year ago and 22% sequentially.

The year-over-year decrease in gross margin results from lower margins across our product line due to competitive pressures, as we grew market share during the economic downturn, combined with a mature product line that is transitioning to the new Intel Nehalem CPU, which was launched on March 30. This was partially offset by our inventory reserve being lower year over year due to our improvement of inventory management to reduce excess and slow-moving inventory through product conversion and increasing sales efforts. The sequential decrease in gross margin resulted from the same influences of the pressures from the economic downturn and the product transition to Nehalem, as well as an increase in inventory reserves.

Slide 13. Operating expenses were $14.6 million, down from $15.6 million in the same quarter a year ago and down from $15.6 million sequentially. As a percentage of revenue, operating expenses was 13.4%, up from 11.4% year over year, and up from 12.2% sequentially. Operating expenses was lower on an absolute dollar basis, both year over year and sequentially. We saw both year-over-year decreases in absolute spending in sales and marketing, as well as G&A expenses.

Sequentially, we saw a decrease in R&D expense, which could have been lower, except for a delay in a project caused us to defer NRE credits. Headcounts decreased by one sequentially. Overall, our third quarter operating expenses are evidence of our tight control on spending during this economic downturn.

Operating profit was $1.8 million, or 1.6% of revenue, down $7.5 million, or 80.2%, from $9.3 million a year ago, and down from $6.8 million, or 78.5%, sequentially. Net income was $2.4 million, or 2.2% of revenue, down from $3.5 million, or 59.2%, from $6 million a year ago, and down $4.3 million, or 63.8%, from $6.7 million sequentially.

Our non-GAAP fully diluted EPS was $0.06 per share, down $0.09 from $0.15 per share a year ago and down $0.11 from $0.17 per share sequentially. The number of fully diluted shares used in the third quarter was 38,893,519.

The tax rate in the third quarter on a non-GAAP basis was a benefit of negative 44.3% compared to 36.4% a year ago and 20.8% sequentially. The tax rate was primarily affected by the reinstatement of the Federal Reserve Research and Development tax credit and an adjustment to reduce a higher level of tax reserve than is currently warranted. We expect the effective tax rate to be approximately 30%.

Turning to the balance sheet on a sequential basis, Slide 14. Cash and cash equivalents and short-term and long-term investments were $77.4 million, up $2.5 million from $74.9 million in the prior quarter. In the third quarter, free cash flow was positive $3.2 million, and the net change in cash was a positive $2.4 million. For the nine-month period, free cash flow was a positive $10.7 million, and the net change in cash was a positive $11.2 million.

Accounts receivable increased by $3.2 million to $42.8 million, and DSOs was 35 days, an increase in four days from the prior quarter. Inventories decreased by $6.2 million to $82.9 million, with days in inventory increasing by one day to 85 days. The Company continued to make progress in managing inventory in the quarter while preparing for product launches such as Nehalem and 2U Twin-squared. Accounts payable decreased by $5 million to $60.5 million as the days payable outstanding decreased by five days to 62 days. Overall, cash cycle days were 58 days, an increase of 10 days from the 48 in the prior quarter.

During the quarter, we spent approximately $200,000 to repurchase about 55,000 shares of common stock. To date, we have spent about $2 million to repurchase approximately 445,000 shares of the 2 million shares authorized by the Board at an average price of $4.56 per share.

Now for a few comments on our outlook. As indicated previously, the third quarter was difficult due to the global economic downturn and the technology transition. Many economic reports suggest that we could be reaching a bottom within this economic downturn.

The Nehalem processor launch was done on March 30. As a result, we do expect improving conditions surrounding the adoption of both newer CPU platforms and our newest product lines. Therefore, the Company currently expects net sales for the quarter ending June 30, 2009, in a range of $117 million to $127 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.08 to $0.11 from 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.

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

Thank you, Howard. Before I turn the call over to questions, I would first like to thank all of our dedicated engineering team here at Super Micro. Their hard work and commitment to our strategy of being the most innovative and always the first-to-market company has built Super Micro into a technology leader. The dedication of our employees to build the best product portfolio in the industry for our customers, like the hot-pluggable 2U Twin-squared, the GPU in 1U and four GPU in 4U solutions and a strong Nehalem product lines, give me great confidence that our future will be strong and bright.

Now let me turn the call back to Perry.

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

Thank you. (OPERATOR INSTRUCTIONS.) And we'll first go to Alex Kurtz with Merriman, Curhan, Ford.

Hi. Good evening, gentlemen. Can you hear me okay?

Yes.

Yes.

Okay, so Howard, just real quick on a housekeeping item. Did you give the unit volume for server components and servers in the quarter?

We did not.

Could you share that with us? Do you have that on you?

Yes, let me come back to that question.

Okay. And then, yes, then the ASP on the server component would be great, too. So just looking at your guidance, expecting sequential growth into June, could you just go into detail what gives you guys that visibility and that confidence? Because the last couple of quarters have been challenging for you guys. Do you have a real sense that a good chunk of business has been pushed out because of Nehalem and you really expect it to fall in the June quarter?

Yes. Because Nehalem, big (inaudible), just the dated for March 30. So only true data variable Q1, for last quarter. So now we have completed the Nehalem program are available with the brand-new architecture I just mentioned, 2U Twin-squared, which has been very attractive to our customers. So we strongly believe that business this quarter will surely be better than last quarter.

Okay. And Howard, on the OpEx line, are you guys taking any actions there to lower your OpEx going into the June quarter?

Yes. I think, as we talked about on the call, we've lowered our OpEx by about $1 million sequentially, and we're not stopping there. We're taking further actions to reduce our costs while continuing to invest in the technology that's setting us apart from the market.

So would that come out of G&A or marketing? Where would you find it?

I think we're going to see it all the way across the board.

Okay. And guys, what have you seen the first couple of weeks here, or the first month of April? How has activity been compared to March?

Basically we see a signal it is quite positive.

Okay. Okay. And Howard, I'll step aside here, but do you have those numbers yet?

Yes, I'm going to release the server numbers right now--39,000 compared to 41,000 last quarter on the units per server unit. And the ASP, I did give it at $1,100 versus $1,300 last quarter.

Okay. And the server components?

I'll get back to you on that one in just a second.

All right, no worry. Okay. Thanks, guys.

Our next question, then, is from Michael Burns with Kennedy Capital.

Good afternoon, gentlemen. Just a couple of questions on--what I wanted to explore with you guys about is where the gross margins will trend, where you think the pushes and pulls are on that. Obviously, the fees are down a little bit, lower utilization and that kind of thing, but what do you think that picture looks like over the course of the year as you start to see ramp in the newer products? And if you can speak in even just relative terms on some of the newer products versus some of the ones that are maybe seeing end of life or something else, what the margin difference is going to look like between those two things?

Yes. Specifically, our former history, whenever Intel has a new CP unit chipset, in that quarter or the next couple of quarters, we'll see the margin. And we have a good chance to grow our revenue. So this time, no difference than before, except this time the change, the difference can be bigger. Because before, every two years, Intel had a new launch. This time, indeed, it's more than two years, about two years and 10 months. So for the energy accumulator there, for Super Micro, indeed have been more than before. And this new product, for sure, we will have a bigger margin.

Okay. But Charles, if you want, I don't know if you can really put any numbers around that, but if you would, just a relative sense, and would you see margins, between newer and older products, would they be 20% better or--? Just some sense around that? Is it something where you're going to see substantial, hundreds of basis points improvements, or--and I'm not going to pin you down for something in the next quarter or like that. But just, what's the potential for you guys to fill in there?

Howard, you have the most, probably the numbers?

Yes, I think, Mike, if you look back in history, back about 2.5 years ago when we did the Woodcrest MP launch, that after a time, I think preceding that quarter, you'll see about a point or two differential as we released the new product.

Okay.

So I think, if I take you back historically, if this research holds the same, we saw about a 1% to 2% increase in gross margin as we ramped the new product with the new technology.

Okay. And that pretty much would be from mix and new products. But then, as you think about overall utilization improvements as we pick up volumes, do you think you can pick up another couple of hundreds bps from that as well and get you back toward that range you guys were sitting in before over the last 18 months or so?

You'll know that our production expenses, quite frankly, are quite low, so the influence of utilization is not quite as high at this Company as in other companies.

Okay.

Okay, so we are taking other cost measures to make sure, and working with our vendors very diligently to make sure that we can improve our sales.

Okay, fair enough. And then just on the R&D side, now, you talked in the presentation about several new groups of products, and honestly, some things that looked like they really expand your addressable market. A couple of things I wanted to ask you about that. One is you, particularly for the Atom-powered embedded stuff, do you see that as really being incremental to the, in your current business? Or is there something where you're maybe going to (inaudible) and cannibalize a little bit of what you have currently?

It's won't be completely incremental. But on (inaudible), for sure, more than welcome to have a decline, and offset indeed, over one and offset by the new products. So we, historically, in 2000, 2002, 2004, and 2006, we see a big growth in a quarter with a new product. This time indeed, with the new launch (inaudible), as to how many percent because the economical has been so tough, so we tried to be conservative. And that's why Howard gave you a guidance of 117 to 127.

Okay, fair enough. I guess, Charles, I'm not thinking just about some of the Nehalem-based stuff, but I was speaking specifically on the Atom-embedded things, whether that takes away from mother--again, non, but other types of embedded products. But also, then, speaking broadly about some of the storage items and things and just sort of is this, do you guys foresee this being more incremental to your business? And if you can size that at all? How much does that really add for an addressable market for you?

It's hard to say, all the way from 10% to 13, but it really depends, because the, again, the (inaudible) of today's poor economical climate made us try to be conservative.

Okay, fair enough. And then the last question, in terms of you guys have talked about controlling expenses, which you've done a good job with, but continuing to spend in R&D, which is great. How much of your R&D spend is going towards these more incremental product lines? And Charles, I don't know if you and I have ever talked before about what your hurdle rate is on--what you need to see back as a return on that spend for R&D before you'll really approve a project for that. If you can talk about how you approach that, I'd appreciate it.

Okay. Yes. Basically, in the last two quarters, we saw most of the competitors tuck in their R&D expense, their engineering inside. But here, we did not. Indeed, we continued to grow, decided to grow in our engineering, to proceed. And at which end now, we have a Company, a big Nehalem product online ready, the 2U Twin-squared, new (inaudible) is completed, ready for full production. Our GPU product line will be ready for production this quarter, and Itanium product line will be also ready this quarter. So yes, our R&D expense in that type of quarter will, end of, we won't see that spending, not on this quarter, especially. And, of course, we already have such a strong product line ready now. So in the next couple of quarters, we do not have plans to continue to grow our R&D expenses. Basically, we're saturated here for R&D expense.

Okay. So I expect to see some leverage across the R&D line, then, into the fall?

Yes.

Okay.

And Michael, I'd like to just remind you, like I said, again, we pride ourselves on our building block base, so a lot of these things have been developed, and we're just retuning these things. So it's not incremental, or it's more cost-efficient for us to develop new products than many of our competitors which have brand-new designs.

Okay. Fair enough. Thanks, gentlemen.

(OPERATOR INSTRUCTIONS.) We'll next go to Glenn Hanus with Needham and Company.

Good afternoon. Did you talk at all about blades and how you're doing in ramping up blades?

Okay. Our blade products, indeed, have been growing very steadily. Even in this poor economic climate. Our blades this year, actually will be a 2X to 3X growth. So that kind of growth, indeed, I question if the opportunity, given the economical conditions. And we will introduce indeed a (inaudible) blade very soon. And also highest reach for blades, independent highest reach to the market, so overall, blade production should be a very successful one, although we did not see a big revenue yet.

Okay. So you're looking for sequential growth there in the next couple of quarters?

Yes. It should be seeing growth for the next couple of years as well.

And then on the new product launches, can you give us the tough frame that each of these and the relative, which is the biggest and which is--some relative size to think about in terms of revenue contribution?

Okay. For Nehalem, lots of big, big things for Intel, and especially with (inaudible) line. And then 2U Twin-squared, the good thing it's a brand-new architecture, a high processor 2U Twin-squared. Some customers call this product low cost to operate, but there's lots of features. That's a great server, but cost-wise, much lower. So 2U Twin-squared has a possible feature, we believe, quite a potential.

As to GPU, as you may know, in the industry, more and more people now like to take a GPU advantage. And no people have really optimized a GPU submission so far, and we will have 1U, support two, four (inaudible), four high in a couple of weeks. GPU solution in 1U. And also a four-GPU, a high-end GPU in 4U. So those unique products, I believe will create significant revenue for us. Start to ramp by June. (Inaudible) and quantities (inaudible) by June. Really high (inaudible).

Okay, and then the items from Slide 8, what's the timing on the storage and the switch, and we know it stumbles out a little later. Can you give a rough timing on the upcoming product launches and what should be, what's the biggest and relative basis, which are the most important from a revenue perspective?

Okay. For storage, we will introduce the Super SBB by storage-free space. We call it super set, because by industry standard, only operate UPs, unit processors. Super Micro so far the only company with a product dual processor, SBB platform. And I announced that SBB will be launched and quantities will start to ramp up starting in June. Again, this quarter we don't see, we won't see SBB's revenue. But next quarter, September quarter, we will see that.

Switch, higher switch product, again we started sampling some switch about one month ago, and the quantity is ramping up. So again, the switch product and the SBB product won't go quickly. But that will be like our Superblade, kind of consistent growth, but growth for a long time.

Now, this one is our investment for those high-end storage end switch products are pretty much already there. So basically, we don't need to spend extra money for those product development.

Thank you.

And it appears at this time we have no further questions in the queue. I'd like to turn the conference back to Mr. Liang for any additional or closing comments.

Thank you, everyone, for joining us today, and we do look forward to talking to you again at the end of the quarter. Thank you, everyone. Have a great day.

Thank you, ladies and gentlemen. This does conclude Super Micro, Incorporated, third quarter and fiscal 2009 conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.