超微電腦 (SMCI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Fourth Quarter and Full 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 presentations, all participants will be in a listen-only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question-and-answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded Wednesday, August 5, 2009. A replay of the call will be accessible until midnight, August 19, by dialing 1-888-203-1112 and entering the conference ID number of 8479500. 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'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead.

Good afternoon, and thank you for attending Super Micro's conference call on financial results for the fourth quarter fiscal year 2009, which ended June 30, 2009. 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 and Exchange Act of 1934. Such forward-looking statements do not constitute guarantees of future performance and 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, our dependence on continued growth in the markets for X86 blade servers, blade servers and embedded applications, increased competition, difficulties of predicting timing of new product introductions, customer acceptance of new products, 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. 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 4. First let me provide you with the highlights of the fourth quarter. We are pleased that our fourth quarter results rebound nicely from the previous quarter with an increase in revenue of 12.7%. The results indicated that we outpaced the industry during the economical slow recovery and then we are gaining market share. These attributes to our strong engineering foundation and continued aggressive investment in R&D during the downturn. We are well positioned for future growth.

Super Micro's revenue in the fourth quarter was $133.5 million, or 17.1% lower than last year. Non-GAAP net income was $3.8 million, or 53.2% lower compared to last year. Super Micro's non-GAAP earnings per share was $0.10 per diluted share compared to $0.06 last quarter or $0.21 last year. Slide 5 please.

Now I would like to share with you our achievements during the past fiscal year and especially last quarter. Fiscal 2009 was a challenging year due to the global economic downturn that impact IT spending worldwide. Still, Super Micro managed strong investment in its product lines and launched some major new innovations. These new developments, along with our business model, led focus on truly application optimum server solutions, allow us to gain market share during this difficult time. Last year we had developed our strongest product line ever and have been well positioned for the technology transition to new generation products based on the new Intel Nehalem and AMD six-core process technology. Especially most of those products started off (inaudible) impact during last quarter. As a result, Super Micro finished this year with a rebound in fourth quarter sales that were 12.7% higher than our third quarter this year. And we expect this ratio will continue for quite awhile.

More importantly, (inaudible) Super Micro gained market share. Specifically, economics met our products performance (inaudible) and provide more attractive to our (inaudible) as well as new customers. In this economical situation, the value proposition of our (inaudible) and energy (inaudible) products led to significantly lower total cost of ownership and opened up new and great opportunity for Super Micro. Our customer base is growing and we are bidding and winning in more new (inaudible) markets than ever before.

As we close fiscal 2009 we are also very pleased to report that while we invest in R&D efforts during this difficult economic period, Super Micro continued it's 16 year trend of profitable results because of its focus on first go to market, efficient operations, and containing costs.

During this past year, as the economic downturn start, IT spend -- many IT vendors decided to cut R&D and other costs as well as lay off workers. Super Micro on the other hand made an important decision to continue to invest and focus on the R&D in order to enhance our product lines and to better position the Company for future growth. It was our belief that the leader of tomorrow would be those who keep on advancing their technology by investing in innovation and product development for the future.

Super Micro's strong foundation base on its advanced server technology and started engineering work. Over the years we have become the leader in our industry. For example, we were the first to introduce the tower (inaudible) server and storage technology. The UIO servers, the twin system architecture and most recently the launching dual and quad GPU system architecture. GPU is graphic processing unit. Most of the time, our competitors need a few months or a year to follow and make similar products a better way in the market. Please come to Slide 6.

In fiscal 2009, our investment in R&D has furthered our technology advantages. The new 2U Twin2 server architecture features four DP computing nodes with 93% high efficiency gold level power supply design in the 2U form factor. This breakthrough product line established the highest performance per watt at over 375 gigaFLOPS per kilowatt, which yields up to 25% net power savings over the industry's regular 1U server. More impressively, the four DP nodes are fully hot-pluggable and cable free for ease of maintenance and optimized cooling systems.

Most recently, we have launched a family of GPU optimizer systems. Again, graphic processing unit, designed to meet the requirements of high performance computing demands. The new architecture feature multiple (inaudible) Gen2 connectivity to each GPU. Similarly optimized cooling and gold level power efficiency as well as system structure enhancement. The systems are truly the fastest server in today's industry. With multiple (inaudible) of performance in the 1U or 4U chassis.

In a recent assessment, one of our customers used this solution and made it on June 2009 (inaudible). This is the most powerful super converter in the world. The solution is also the most energy efficient (inaudible) in the commodity system space (inaudible).

During the quarter, our engineering team introduced the (inaudible) server product line in the industry starting with the launch of Nehalem processor. When Nehalem was launched on March 31st this year, we showcased our first go to market and the best product line in the industry with about 80 SKUs of server boards, more than 30 chassis models, and the (inaudible) superserver ever launched. We continue to develop and broaden Nehalem product line to be a strong growth driver for Super Micro.

Also, during the quarter, we have focused and launched a series of SM based imbedded products and a set of high density stack storage platforms. The SM solution optimized for value server (inaudible) or imbedded (inaudible) PC applications. With their extremely low power requirement and nearly silent noise level, the high density stack storage solution will save customers up to tens of thousands of dollars per req in electricity costs during the (inaudible) by utilizing Super Micro's green technology and (inaudible) hard drive.

Last but not least, Super Micro delivers many (inaudible) gold level power supply with PM parts (inaudible) most of our new super server high end systems including (inaudible) server. Super Micro also provides (inaudible) system (inaudible) with its universal IO/UIO interface that allow customers to choose from a host of IO cards including (inaudible). For the most value and best (inaudible) management, Super Micro (inaudible) 2.0 with (inaudible) most of our new platforms. As well as (inaudible) cost effective DBR and high performance (inaudible) more options.

As we look ahead to the new fiscal year, we will continue to fully utilize our business model advantages of strong engineering and technology leadership, strong customer partnership, and strong market focus to continue winning much share for Super Micro. With that in mind, let me share with you some of our new product offerings that will launch in the next few quarters. Please turn to slide 7.

Super Micro Twin Blade. Based on our twin architecture, we (inaudible) in a 7U space. We are now able to provide 28 DP nodes or 56 CPU sockets which depends on 10G connectivity options. This high density and high (inaudible) solution will be most suitable for today's HPC and data center applications.

Our new generation 4-way MP system. One of our new generation 4-way system will be based on Intel Boxboro chipset and the new Nehalem EX MPTPU. With (inaudible) which provide a much higher memory and IO bandwidth than the previous generation 4-way system. And then our networking products. We have been quite successful in developing switch for operating and adapting for our server. We see increasing demand from our customers for standalone switch. We have introduced two models of (inaudible) switch and are continuing to develop more products (inaudible) 10G connectivity and those products will be available soon as well.

And also our Super SBB has started (inaudible). Using our twin design concept, we are developing a fully functioning super set of standby SBB solutions which can incorporate or bridge (inaudible) or fiber channel storage solutions. With that, let me hand it over to our CFO, Howard Hideshima for our financial 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 reflect adjustments to exclude stock compensation expense. 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 a review of the fourth quarter income statement. Please turn to Slide 8. Revenue was $123.5 million, down 17.1% from the same quarter a year ago, and up 12.7% sequentially. Revenue for the fiscal year was down 6.5% from the same twelve-month period a year ago.

The decrease in revenue from last year was fairly widespread among our customer base, which we believe was primarily attributable to the global economic downturn. The sequential increase in revenue from last quarter was primarily due to the continuation of the improvement we had seen in the economy which started in March of this year, the ramping of new products such as our Nehalem based solution, and an increase in the component sales such as CPU, hard disc drive, and memory.

Slide 9. Turning to product mix, the proportion of revenue from server systems was 37% of total revenue which was a decrease from 39% a year ago. And last quarter ASPs for servers was $1,400 per unit which is up from about $1,300 per unit last year and $1,100 per unit last quarter. The increase in server products was primarily due to an increase in shipments of Series 6000 servers.

We continue to maintain a diverse revenue base, with none of our over 450 customers making up more than 10% of our net sales in the fourth quarter. Furthermore, 65.6% of our revenues came from the US, and 65.3% from our distributors and retailers. Internet data center revenue was 5.8%, which is a decrease from the prior quarter of 12.1%.

Slides 10 and 11. Non-GAAP gross profit was $20.6 million, down 27.9% from $28.6 million in the same quarter last year, and up 25.1% from $16.5 million sequentially. On a percentage basis, gross margin was 16.7%, down from 19.2% a year ago, and up from 15% sequentially. Price changes from Ablecom resulted in a positive two basis point change to gross profits in the quarter, with total purchases representing approximately 19% of total cost of goods sold, compared to 18.6% a year ago and 18.1% sequentially.

The year-over-year decrease in gross margin resulted 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 was transitioning to the new Intel Nehalem CPU, which was launched on March 30th. The sequential increase in gross margin primarily resulted from higher margins as we ramped up sales of the Nehalem solution.

Slide 12. Operating expenses were $15.2 million, down from $16.7 million in the same quarter a year ago and an increase from $14.6 million sequentially. As a percentage of revenue, operating expenses was 12.3%, up from 11.2% year over year, and down from 13.4% sequentially. Operating expenses was lower on an absolute dollar basis year over year and higher sequentially. We saw year over year decreases in absolute dollar spending in sales and marketing due primarily to about $819,000 of lower co-op marketing funds due to lower revenue levels.

Sequentially, we saw a increase primarily in G&A expense due to an increase of $216,000 in accounting and tax use associated with our yearend audit and soft compliance which is expensed as incurred.

Headcount increased by four sequentially to 865 total employees. Overall we have maintained good control of our operating expenses while at the same time maximizing our opportunities for investing in our future. Operating profit was $5.4 million, or 4.4% of revenues, down $6.5 million, or 54.6%, from $11.9 million a year ago, and up $3.6 million, or 192.6% sequentially. Net income was $3.8 million, or 3.1% of revenue, down $4.3 million, or 53.2%, from $8.1 million a year ago, and up $1.3 million, or 54.7% from $2.4 million sequentially.

Our non-GAAP fully diluted EPS was $0.10 per share, down $0.11 from $0.21 per share a year ago and up $0.04 per share from $0.06 per share sequentially. The number of fully diluted shares used in the fourth quarter was 39,467,254. The increase in diluted shares was primarily due to the impact of options which were previously [under audit].

The tax rate in the fourth quarter on a non-GAAP basis was 28% compared to 32.1% a year ago and negative 44.3% 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 reserves than is currently warranted. We expect the effective tax rate on a non-GAAP basis to be approximately 32% for the September quarter.

Turning to the balance sheet on a sequential basis, Slide 13. Cash and cash equivalents and short and long-term investments were $85 million, up $7.6 million from $77.4 million in the prior quarter. In the fourth quarter, free cash flow was positive $7.6 million, and the net change in cash was $7.6 million. For the 12-month period, free cash flow was a positive $18.2 million, and the net change in cash was a positive $18.8 million. Subsequent to June 30, on March 24 and August 4 the Company paid off $10 million of the mortgage loans which will eliminate the interest expense for the remainder of the year from these loans and leave the Company with no debt. The Company has recorded approximately $257,000 in G&A expense during the present quarter for prepayment penalties and write off of loan fees.

Slide 14. Accounts receivable increased by $2.9 million to $45.7 million, and the DSO was 33 days, an decrease of two days from the prior quarter. Inventories increased by $7.1 million to $90 million, with days in inventory decreasing by 8 days to 77 days. The Company managed inventory well as we supported new products such as Nehalem and Istanbul-based solutions as well as GPU and 2U Twin2 servers. Accounts payable increased by $13 million to $73.5 million with the days payable outstanding decreasing by two days to 60 days. Overall, cash conversion cycle days were 50 days, an decrease of 8 days from 58 days in the prior quarter.

Now for a few comments on our outlook. As indicated previously, during the fourth quarter we saw continuing improvements in the economy and the ramping of sales of our strong new product innovations based on the latest technology introduction. Therefore, the Company currently expects net sales for the quarter ending September 30, 2009 in the range of $128 million to $138 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.11 to $0.14 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.

Thank you, Howard. In summary, we saw strong Nehalem product line continue in the (inaudible) and we saw mostly innovative 2U Twin2 and GPU solutions starting their volume production (inaudible). As well as our other coming product launches. We are confident that the new year will further demonstrate our technology leadership and we will contribute a strong growth for our shareholders. Now let me turn the call back to Perry.

Operator, at this time we are ready for questions.

(Operator Instructions). Doug Reid, Thomas Weisel Partners.

Thanks. Congratulations on the nice quarter. I just wanted to get a sense on gross margin within components, servers. I know you don't break out explicitly gross margin therein, but can you give some color behind just gross margin trends then for those two areas?

Yes, basically with new product launch like the Nehalem and like our 2U Twin2 with GPU, new product always provide us a better margin. And Howard, do you have anything?

Yes, Doug, as we talked about before, between servers and component sales, there can be as much as a 5% to 10% differential depending upon the application as far as what type of box we're putting together and how complex that box may be. But in all product lines were basically very strong for us in gross margin increase.

Okay, great. And then just quickly on the data center sales, kind of a fairly steep drop off, but I'm wondering if you could provide some visibility into what you're seeing now and what your expectations are for the September quarter from that segment.

Yes, Doug, this is Howard again. Like I said, we've always said it's kind of project by project based. So you'll see fluctuation in that. I think previously a couple of quarters ago, you'll see 7%. It was 12% prior quarter and about 6%, 5.8% this quarter. So you'll see project by project basis. We believe we have great technology and that will be appealing.

Great. Thanks.

(Operator Instructions). Glenn Hanus, Needham & Co.

Good afternoon, guys, and congrats on your quarter. Maybe if we circle back to gross margins for a second, could you talk a little bit more about the puts and takes driving gross margin and the trend going forward here? What was the extent of price, competitive price pressures in the quarter? And that was probably offsetting gains you were seeing from new products. So could you talk more thoroughly about the puts and takes on gross margins this quarter and what we should think about in our models going forward?

Basically our business have been very consistent and stable. However, as you know, since many years, whenever there are new products, new innovation, we have a better quarter, couple quarters continue basically. And this time Nehalem that was original launch by end of March. So indeed Nehalem (inaudible) quickly ramping up here including September quarter. Especially 2U Twin2 which provides a lot of new features and that will generate better ASP compare margin as well. And GPU, GPU is a brand new architecture we just create and introduced to the market, in production about three weeks ago. So that product is ramping up quickly. And again, brand new product, pretty much no store competitor in the market today. So we foresee better margin from those products at least the next few months or few quarters.

You want to add to that, Howard? To what extent is Nehalem -- you're probably not going to give me an exact number or anything -- how much of your product does Nehalem represent? It just started. Is it kind of in the early innings or has it -- we're expecting it to be most of your volume base within a few quarters. Can you talk about how quickly that's ramped? Because I assume that's impacting the gross margin trend.

Yes, it is, Glenn. Great question. Again, I think the best way to characterize it, it was just launched on March 30, right? So we just started ramping up on this thing. I think it's been positive, it's showed some ASP effect, we've seen the increase in our ASPs going from about 1,100 last quarter, in the third quarter, to about 1,400 in this current fourth quarter that we just finished. So it is contributing there. But it's just ramping.

And how about the competitive pricing pressures? How would you characterize that? About the same as last quarter? More severe? Less severe? How is that?

It is slightly [increased].

Okay, thank you.

(Operator Instructions). Alex Kurtz, Merriman, Curhan, Ford

Just to follow up on Glenn's question there -- so you are seeing an easing in pricing pressure? Or an increase in pricing pressure?

Hi, Alex, this is Howard. I think generally we're feeling pretty good about the economy as far as it started off in March starting getting stronger for us. So I guess it's a mixed bag. If you call it pricing pressure or the economy recovering, we're feeling better with that momentum starting to build in the March period, continuing through that fourth quarter.

But just to clarify, so you -- are Dell and HP applying more pressure than they have in the past because they're -- well first of all, congratulations on the quarter, but as a follow up to Glenn's question, so you are seeing pricing pressure or not?

Basically I mean we have a product architecture advantage. So it's basically 2U Twin2 and we provide even hot-pluggable capability. But (inaudible) GPU now pretty much we are (inaudible) as it is, right? (Inaudible). So we should have a better kind of competition position in the coming quarters.

Okay, and Howard, can you just give us the unit counts on the servers and the components?

Yes, Alex, let me get back to you in just a second with that.

And as you pull that up, I know that Nehalem is providing a lot of momentum going into the September quarter, but I'm just going to ask you now, if you look at the midpoint of your guidance, obviously it's up sequentially. Q1 is typically a down sequential quarter for you guys. So can you give us the rationale in sort of thinking about giving an up quarter guide still in a pretty choppy tape? And sort of what gives you that confidence in your pipeline to do that?

Yes, in history basically September quarter usually is soft compared with June. But this year we are very happy we see a pick up. Again primary because of new products, especially our 2U Twin2 hot-pluggable and GPU and for sure Nehalem is another big contributor for us.

And Alex, just dovetailing back to your question, server units were 33,000.

Okay. And what about components?

523.

523. So, Howard, do you want to add to that any comments about the pipeline and sort of what you're seeing from your managers out in the channel and sort of the sense about demand for Nehalem going into September?

I think it's characterized by the economy itself or maybe just the feeling that everything is getting a little better, at least in our business over here. And I feel better about as we enter this quarter.

Okay, and last question for this round. Howard, you hit 9% on non-GAAP operating margin back in September of last year. That was obviously at a higher run rate. But can we extrapolate that maybe by the end of fiscal '10 maybe we could get back to those levels if sort of the demand picture sort of remains intact if not improves from what you're seeing right now?

Alex, I guess the best way to put it is that we're still just giving the quarterly forecast We still see strength. We've seen our guidance go up to $128 million to $138 million for this quarter which is an improvement in our trends and so we're hopeful. We're continuing to watch our expenses and implement programs and make sure we keep an eye on that operating expense and then we'll keep driving with the new products that Charles was mentioning to keep driving our revenue and hopefully our gross margins.

Okay, thanks a lot, guys, and congratulations on a really good quarter here.

Nehal Chokshi, Technology Insights Research.

Hi, guys. Good job on a nice quarter there. Could you talk a little bit about why component, what drove components to be up about 20% Q to Q compared to systems up 5% Q to Q? And then follow that up with where you see those two segments performing for the next quarter?

Yes, Nehal, how are you doing? With regard to components, I think it's more driven by our customers. Again. They're utilizing our new solutions, our latest technologies, and they're asking us to provide a little bit more of the full solutions in there. Although we may not be putting it together in our own boxes, we are shipping it to them, components that are basically qualified to work with our solution. So that's where the trend is. I think it's an overall.

Okay. So going along that line, it sounds like that will continue to be the case. Yet you saw 170 basis points of GM improvement. So on the lower margin product line. So it seems like the new products are doing very well in terms of the price. Would that be an appropriate way of characterizing that?

Absolutely, Nehal. I think the ASP increment that you saw there, about 1,400, from 1,100 to 1,400 (inaudible).

And could you just share, within the customers for components, was there any particular segment for the component that customers were especially strong or geographies that were especially strong that you could talk about?

Basically we see a very evenly level basis and no space is better than the other. But because we are (inaudible) consistently

And then last question, do you have any thoughts on what your addressable market grew on a sequential basis? Any guidance you can provide would be helpful.

Yes, Nehal, I think the addressable market is actually increasing for us. Charles mentioned a little bit about the imbedded market still. That presents great opportunities for us into the future, right? That's above and beyond the X86 market for us and so we're making great traction there. And then the other markets that we service, especially with the new products that we're launching like the GPU and those things, are opening up other market verticals for us like oil and gas or film or industry and those type of markets are opening up to us.

Thanks, guys.

Glenn Hanus, Needham & Co.

So did I understand you to say that globally there were no particular strengths or weaknesses from a territory standpoint globally? It was fairly balanced in your view? Or how -- maybe you can just talk kind of about your international business by region versus domestic in terms of the kind of demand trends you're seeing.

Europe. Europe is a bit weaker. And Asia is strong because of China. So other than that it's been even.

Yes, it's been pretty even, Glenn. Like I said, you'll see a little bit of increase in our US geographic. I said 64% of our revenue came out of the US as compared to about 60% last quarter.

How about operating expenses, Howard? You had a little blip up there in G&A on the -- I forgot exactly what it was.

The audited tax piece.

Yes, right, the audit. So OpEx in September, will that be flat to slightly down?

It's a time and material base for let's say the audited tax and soft work. So that basically, we don't incur as much in the present quarter because we're doing our yearend stuff then in the fourth quarter. However, I want to make note that again, we do have about $256,000 of loan fees and those things that will be recorded in the G&A line. So an offset basically there.

Okay. Thank you.

And it appears at this time that we have no further questions so I'd like to turn the call back over to Mr. Liang for any additional or closing remarks.

Thank you for joining us today and we look forward to talking to you again at the end of next quarter. Thank you, everyone.

Thank you.

Thank you, ladies and gentlemen. That does conclude the Super Micro, Inc. fourth quarter and fiscal year 2009 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.