超微電腦 (SMCI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated First Quarter Full Fiscal 2010 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 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 Tuesday, October 27, 2009. A replay of the call will be accessible until midnight November 10, by dialing 1-888-203-1112 and entering conference ID 7248744. International caller 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 sir.

Good afternoon and thank you for attending Super Micro's conference call on the Financial Results for the First Quarter Fiscal Year 2010, which ended September 30, 2009. Before we begin, I'd like to advise you of upcoming investor conferences which Super Micro will be participating.

On November 4th, we attend a conference in Boston sponsored by Credit Suisse where we will participate in one-on-one meetings only. On November 10th, we will present at the Merriman Investors Summit in New York, which will be webcast.

By now, you should have received a copy of today's news release that was distributed at the close of regular trading and is available 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 start, I'll remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon or Form 10-K for fiscal 2009 and our other SEC filings. All of these documents are available from the Investor Relations page of Super Micro's website at www.supermicro.com. We assume no obligation to update any forward-looking statement.

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. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. And now I'll turn the call over to Charles Liang, Chairmen and Chief Executive Officer.

Thank you, Perry; and good afternoon, everyone. Please turn to slide four. First, let me provide you with the highlights for the first quarter. We are pleased that our first quarter revenue was $148.5 million or 20.3% higher quarter over quarter, and 3.1% higher year over year.

The result indicated that we again outpaced the industry and that we continued to gain market share. Non-GAAP net income was $5.8 million or 54.6% higher quarter over quarter, and 30% lower than last year.

Super Micro's non-GAAP earnings per share was $0.15 per diluted share, compared to $0.10 last quarter or $0.21 last year.

Please turn to slide five. Last quarter was a strong quarter of growth for Super Micro and it was the second quarter in a row for strong growth. We believe that we have reestablished our upward trend and we will extend this growth in the coming quarters.

Super Micro is very well-positioned for future growth because we have developed the strongest product line in our history. Many more customers value Super Micro's application optimized solution to help them realize their goals of maximizing performance per watt and per dollar. Respectively, the goal we set for ourselves is to continue to outpace the industry and to take more market share.

Last quarter we saw a stable product line contribute to our strong revenue growth. First, we clearly saw an improvement in the adoption rate of the Nehalem processor-based solution. Because we have been first to market with the broadest Nehalem product line in the industry, we saw a very positive impact to our revenue from Nehalem by offering more selection, value and quality. We expect further gains from Nehalem-based solutions for the next several quarters.

Second, our 2U Twin 2; the market leading architecture introduced two quarters ago, continued to see strong growth and customer's preference; [deployment] such as four hot-pluggable capability and cable-free design have made this product one of our most popular ones.

Third, the new GPU optimized system architecture we have created is the fastest server in the industry with multiple tier approach of performance in 1U or 4U chassis. They have performed well in vertical markets such as education, government, or oil and gas.

Fourth, this quarter we have also launched AMD's Istanbul 6-core solution. Once again, Super Micro was first to market with the broadest product line in the industry. Additionally, this quarter we benefitted from stronger demand from IT managers as the economic climate improved.

Together with our marketing product line, we were well-positioned to sell our Super Micro brand into the recovering economic and tech (inaudible) order new technology spending overall.

In summary, our revenue growth is evidence of our ability to outperform in the competitive environment and to gain market share. Super Micro's strength of providing customers with technology-leading products that help them improve performance and reduce product cost of ownership, is allowing us to build our brand and grow our business.

As you may already know, our potential to grow our business is not limited to our largest geographic market, the United States. We are certain that we also have a strong opportunity to grow in Europe. In order to grow our European business, we have made investments over the past year to increase the size of our logistic center and establish our new integration facility in the Netherlands.

Now we are taking the next step to expand our business model to Europe. In the upcoming quarters, we will start to ramp up our completed server solution production in the Netherlands for our European customers. Our European integration capacity will allow us to grow our European business by meeting customer requirements faster. Moreover, it will also allow us to reduce logistic expense by rerouting our supply line to Europe.

The Europe expansion is a very important move for us to address the faster-growing demands of our customers during the time of economical recovery and beyond. Please turn to slide six.

In the coming quarters, other than the 2U Twin 2 and the GPU product line that will continue to grow in volume, we will launch some other new products that will further extend our leadership and innovation in server technology.

These products are-- first, TwinBlade; based on our Twin architecture, we doubled the density of our SuperBlade in the 7U space. We will be able to support 20 and 28 DP nodes with 40 gigabyte per second InfiniBand or 10 giga- Ethernet connectivity option. This high-density, high-efficiency yet lower-in-cost solution will be most suitable for HPC and datacenter applications.

Second, our new generation 1U and 2U enterprise optimized rack mount product line; we further optimized for enterprise virtualization applications, including 18 DIMM 94% higher efficiency redundant power supply, more I/O capability, GPU supported and 100% cooling redundancy.

Also our new generation 4-way MP systems; one of the new generation 4-way systems will be based on Intel Boxboro chip sets and new Nehalem-EX MC CPUs with QPI links which provide a much higher memory and higher bandwidth than the previous generation.

And then our Super SBB storage (inaudible); using our Twin design concept, we have developed a full functional and you could say of industry standard SBB solution which can incorporate or bridge (inaudible) storage solutions.

In summary, we are proud of the brand that Super Micro has developed as a technology leader. Our Twin technology and modular designs, allow us to develop products for various applications quickly to meet our customers' demands.

All those ongoing technology innovations and rapid product development capabilities make us feel very confident that we are in the technology leading position in the industry and are on a strong growth trend for many years to come.

With that, let me hand it over to our CFO, Howard Hideshima for the financial details.

Thank you, Charles and good afternoon, everyone. I'll 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 and a provision for litigation loss 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 the review of the first quarter's income statement. Please turn to slide eight. Revenue was $148.5 million, up 3.1% from the same quarter a year ago, and up 20.3% sequentially.

The increase in revenue from last year was fairly widespread among our customer base, which we believe was primarily attributable to continuing improvement in the global economy which we have seen since March of this year. The sequential increase in revenue from last quarter was primarily due to increased attention being put on obtaining cost-effective solutions as the economy recovered and higher purchases of new products such as our Intel and AMD-based solutions continued.

Please turn to slide nine. Turning to product mix; the proportion of revenues from server systems was 34.5% of total revenue, which was a decrease from 38.7% a year ago, and 36.7% last quarter. ASP for servers was about $1400 per unit which is up from about $1300 per unit last year and comparable to the $1400 per unit last quarter. The decrease in absolute dollars of server products from a year ago was primarily due to a decrease in shipments of OEM servers.

The increase in absolute dollars per server product sequentially was primarily due to an increase in shipments of our series 6000 servers.

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, 63% of our revenues came from the U.S. and 68.1% from our distributors and resellers. Internet datacenter revenue was 7.3% which was an increase from the prior quarter of 5.8%.

Slide 10 and 11; non-GAAP gross profit was $24.7 million, down 11.9% from $28 million in the same quarter last year, and up 19.6% from $20.6 million sequentially.

On a percentage basis, gross margin was 16.6%, down from 19.4% a year ago and comparable to 16.7% sequentially. Price changes from Ablecom resulted in a positive 0.2 basis point change to gross profit in the quarter with total purchases representing approximately 22% of total cost of goods sold, compared to 27.3% a year ago and 19% sequentially.

The sequential decrease in gross margin primarily resulted from a lower percentage of sales of complete server solutions as noted above, and an increase in sales to the Internet datacenter, offset in part by transition to higher margin products, incorporating new processors from Intel and AMD.

Slide 12; operating expenses were $15.6 million, up from $14.9 million in the same quarter a year ago and from $15.2 million sequentially. As a percentage of revenue, operating expenses was 10.5%, up from 10.4% a year ago and down from 12.3% sequentially.

Operating expenses was higher on an absolute dollar basis year over year, primarily due to lower NRE and customer-funded projects in R&D. In G&A, expenses for the current quarter included $257,000 of lower prepayment penalties and write-off of loan fees due to our repayment of $10 million in bank loans, which represents all of our loans.

Sequentially, we saw an increase, primarily in the sales and marketing expense due to an increase in marketing development funds and advertising expenses from new products of the Company and from headcount additions preparing the Company for future growth. R&D expenses were lower due to higher NRE and customer-funded projects.

G&A expense for the quarter included $257,000 of loan penalties and fees mentioned above for paying off all of our debt.

Headcount increased by 20 sequentially, to 885 total employees; primarily in operations and sales and marketing. Overall, we have maintained good control of our operating expenses while at the same time maximizing our opportunities by investing in our future.

Operating profit was $9.1 million or 6.1% of revenue; down $3.9 million or 30.5% from $13 million a year ago; and up $3.7 million or 67.8% sequentially.

Net income was $5.8 million or 3.9% of revenue; down from $2.5 million or 30% from $8.3 million a year ago and up $2 million or 54.5% from $3.8 million sequentially.

Our non-GAAP fully diluted EPS was $0.15 per share, down $0.06 from $0.21 per share a year ago, and up $0.05 from $0.10 per share sequentially.

The number of fully diluted shares used in the first quarter was 40,140,358. The increase in diluted shares was primarily due to the impact of options which were previously underwater.

The tax rate in the first quarter on a non-GAAP basis was 35.1%, compared to 36.1% a year ago; and 28% sequentially.

As we increased income faster than we increased our R&D expenses, the percent of R&D credit becomes smaller, and hence our tax rate increases. The R&D tax credit is set to expire on January 1, 2010. Should the credit be reinstated retroactively, then the Company would adjust in the quarter the credit is reinstated. We expect the effective tax rate on a non-GAAP basis to be approximately 35% for the December quarter.

Turning to the balance sheet on a sequential basis, slide 13; cash and cash equivalents and short and long-term investments were $85.2 million, which is about the same as the $85 million in the prior quarter. In the first quarter, free cash flow was a positive $9 million and the net change in cash was a positive $3.3 million. The cash balances reflect the repayment of $10.2 million of bank loans and the associated prepayment penalties during the quarter. Excluding this repayment of debt, the Company's cash and cash equivalents and short and long-term investments would have been about $95.4 million. The Company has no loans.

Slide 14; accounts receivable increased by $4.4 million to $50.1 million and DSOs was 30 days, a decrease of three days from the prior quarter.

Inventories increased by $10.1million to $100.1 million but the days in inventory decreasing by six days to 71 days. The Company managed its inventory well as we met the increasing demand from a recovering economy and transitions to new products such as Nehalem and Istanbul-based solutions, as well as GPU and 2U Twin 2 servers.

Accounts payable increased by $12.8 million, to $86.3 million with days payable outstanding decreasing by one day to 59 days.

Our overall cash conversion cycle days were 42 days, a decrease of eight days from 50 days in the prior quarter.

Each of these balance sheet items points to our managing our working capital well during a time of revenue growth, economic and product transition as well as positioning the Company for future growth.

Now for a few comments on outlook; as indicated previously, during the first quarter we saw continuing improvement in the economy and the transitioning to our strong new product innovations based on the latest technology introductions.

Customers and partners continued to see the benefit that our solutions can provide them by either lowering their overall cost of ownership or by lowering their investment from rolling out new solutions by utilizing our products. We see this trend extending and further expanding to other markets, verticals and new customers.

Therefore, the Company currently expects net sales for the quarter ending December 31, 2009 of $155 million to $165 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.15 to $0.18 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.

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

Thank you, Howard. Our first quarter results were a good beginning to start this fiscal year. We see lots of room in the market for two application optimized server solutions and we will continue to be focused and aggressive in pursuing these opportunities. We are proud of the brands that Super Micro has developed as a server technology leader with our leading architectural designs for systems and (inaudible).

And we are confident that our focus on application optimized solutions will keep us on a strong growth trend. I will now turn the call back to Perry.

Operator, at this time we are ready for questions.

Thank you, sir. (Operator Instructions). We'll go first to Michael Bertz with Kennedy Capital.

Good afternoon, gentlemen. Thanks for taking the questions; nice quarter. I just wanted to ask a couple things across the balance sheet, Howard. So obviously inventories didn't increase as much as revenues, great. How should we think about that-- how flat do you think you can keep that as the business continues to pick up?

You'll historically see us maintain pretty consistent days but we will have spike ups during times of product transition, but we'll try to keep it in the historical limit.

Can you refresh me where that is, Howard?

Sure. You'll see our DSOs for inventory-- this quarter was 71 days. The previous quarter was about 77 days. Prior to that it was about 85; about a year ago it was about 74.

Okay. Alright and then similarly obviously the accounts receivable is basically in the same bucket; sort of rising at the same level as inventories-- about 10% quarter to quarter. It actually looks fairly linear given the revenue coming up quite so much. Again, same question-- do you have the ability to keep that and improve cash flow going forward?

Yes. I believe so. Again, we're seeing improved linearity in our quarters and so again, the ability to maintain our DSOs over the span of 30 days.

Okay. Any difference you'd see with the holidays for that?

Typically if you look back seasonally, you'll see that Decembers are fairly strong quarters for the Company, barring the economic upheaval we just went through. If you go back further back, you'll see that December is usually a stronger quarter for the industry and for ourselves.

Okay and then moving on-- again looking I know Charles, you talked about investments in Europe. Can you give us some flavor on sort of what kind of investments you're making there, what kind of CapEx that might entail; how we might see that leering in over the next several quarters; not necessarily-- you can tell me what you think about revenue, too-- if you want. But just in terms of what kinds of investments you're going to be making?

Okay. And really because the operating (inaudible) our region so it's really not much investment from a cash point of view or money point of view. However, that will dramatically improve our time to market for our products from the Netherlands to the European market and kind of time to market will improve.

Second, also very important is that we reduce the shipping charge. Before, we built most of the servers here; completed the server here in San Jose; and after that we ship to our customer in Europe by air, right? So that created (inaudible) cost for there. So starting from next month, about next week-- next week we will start some more volume production in the Netherlands so that will reduce our shipping costs.

And with those expansions for sure, we already improved our [FAE] fleet application health in Europe as well as growing our sales team significantly. So we do foresee good growth in Europe in the coming quarters and years.

Okay, that's great. I mean just any implications for margin impacts? I mean Europe is not exactly a low-cost manufacturing area, of course neither is the States?

Because we will save enough per system, the shipping by air, almost $80; so $80 saving by air and for sure per 1000 cost in Netherlands may be slightly higher than San Jose, but overall I believe we can still save lots of money.

Great, great. Last question then Howard-- so as we look forward in terms of gross margin-- any thoughts about mix there and what the impacts to margin that might be?

I think as Charles alluded to we'll see some-- hopefully some positive impact as we expand our European logistics just to better service the clients and customers over there. Additionally to that, again we're keeping a tight eye on our expenses overall to make sure that we're making the right investments for the future, while still balancing our expenses currently.

Okay, great. Thanks, guys.

We will take our next question from Doug Reid with Thomas Weisel Partners.

Thanks so much; great quarter. I wanted to get a little closer to the gross margin trends heading into the December quarter, though. Howard, just in reviewing those factors that led to the sequential decline in gross margin; could you talk a little bit about which of those factors are likely to continue on as a headwind to gross margin going into December? And then what kind of profile you might think would make sense of gross margin going into calendar 2010?

Yes, Doug; I think as we talked about on the conference call, we had two things. We have upward push from our new product introductions. I think you'll see that as we introduce new products based on the latest technology. Apart from that, then you'll see some headwinds from us as we just try to take market share; grow our market share more aggressively going forward. And that you saw on the result of the revenue line on the top, I think looking at that pattern going forward.

Okay. And can you give a little more color on where you're seeing strength around the 2U Twin 2 by segment and how concentrated the business you're seeing there is?

In the 2U Twin 2 you know, new product to us since about two quarters ago. And product volume has continued to grow. And believe 2U Twin 2 because it's much better performance per watt and performance per dollar even. So demand you see that we see it continuing to grow. Other than that, our GPU; GPU is another architecture-- brand new architecture we just created about four or five months ago; so (inaudible) are growing very strongly; so all those provide us with a better margin and kind of a greater room to grow in volume this year.

Okay, great. Thank you.

(Operator Instructions). We will go next to Glenn Hanus with Needham.

Okay, good afternoon; great revenue performance and guidance in December. Maybe you could just talk a little more specifically about how much of this do you think is just kind of the economy versus some of the new product releases and company-specific things?

Basically I believe both are important. The economy overall continues the recovery, although slowly but kind of consistently. However, the area-- the factor that we can totally control ourselves is the technology. So we introduced the 2U Twin 2 two quarters ago, GPU about five months ago, and then we will have a TwinBlade in production very soon, but together with Nehalem's new launch, AMD's (inaudible), PCIX gen 2.0; all of those indeed help us a lot and that's why we believe the December quarter should be a strong quarter for us.

How about on operating expenses, Howard; how should we think about sort of sequential growth here in operating expenses? Are you investing a little bit more on the sales side, given the stronger outlook?

Yes. I think that's a fair assumption, Glenn. You saw this past quarter we gave--the sales and marketing expenses did go up sequentially. So again, we're investing in our sales and marketing people as well as the overseas expansion to improve our revenue growth.

And back on the gross margin, again; it sounds like when you net out the factors you're looking for some gross margin expansion into the December quarter?

We don't give the gross margin guidance. But again, like I said, generally if we're able to leverage the revenue growth that we have here, then usually you'll have some leverage in the gross margin.

And this server solutions number going down; is that factor going to kind of reverse itself over the next few quarters, or--?

Again, it's always up and down and the December quarter basically we have good feeling it may come back, especially the European integration facility-- we will [start] next week. We already have some pipeline production in the last few weeks; it looks like everything is going along smoothly, so at least in Europe it's beginning to grow.

Okay. So it sounds like you'll be selling more server solutions and that will help you some. The Internet service provider stuff-- that's kind of lumpy, a little unpredictable. But you mentioned headwinds in order to grow share. So are you pricing a little bit more aggressively or have you seen a little bit more aggressive pricing in the market place and how should we think about that as a factor over the next couple of quarters?

We continue to gain more market share in higher end markets-- another kind of 2U Twin 2; kind of like a GPU-- GPU is pretty much high end; a high-value system. So we do gain more margin from those products (inaudible).

Okay. Thank you.

We will go next to Nehal Chokshi with Technology Insights Research.

Hey, guys; nice quarter. I just want to follow up on some of Glenn's questioning here. With the systems coming up on a Q-over-Q basis, more than components-- I believe that's what you guys were indicating, correct?

Yes.

Okay. But the guidance implies that the EBIT margin is going to stay more or less consistent and so are you guys going to be reinvesting in your OpEx at a faster rate than you expect your sales to grow?

Nehal, this is Howard. Like I said, yes you do see that, but again, I think we'll temper our investments with what opportunities are out there. And on the top line too, we will take a look at our revenue and make some huge decisions there also. But going straight back to your question on Op expenses-- yes, we'll watch that and we'll temper it accordingly to the opportunities that exist.

Okay. So it sounds like there's a lot of moving parts in order to optimize basically profitability in the near term and long term basically, as you look at market share opportunities as well as investments in sales.

That is correct.

Okay. Thank you.

We will go next to Alex Kurtz with Merriman, Curhan and Ford.

Yes, thanks guys and thanks for taking the question and great quarter. So Howard, just to follow up on that question; I mean if we look at September of your last fiscal year you did $144 million in revenue and you did about 9% operating margin. And here we're talking about the December quarter midpoint about say $160 million in revenue in your guidance and sort of implying maybe flat operating margins. So I guess where is the discrepancy again in that? Because you obviously hit much higher operating margin targets about four or five quarters ago. It has just been OpEx creep over the last year; that leads us to a point where you can't do 8% or 9% this quarter?

I think Alex, like I said, it's a combination as Nehal indicated. There's a combination of factors that are happening. One, the OpEx is somewhat higher than it was last year. Sequentially we've kept it fairly consistent and we plan to keep an eye on it and keep it fairly consistent and make the right investments-- I guess that's the best way to put it-- while still at the same time allowing us to grow our top line and our opportunities.

Okay. Alright and then Howard on the unit count; could you just give us the units by servers and components if you have that?

Let me get back to that one, Alex.

Okay and then Charles, I just have a quick question for you. As we head into calendar 2010, how would you sort of see demand from a server refresh perspective based on Istanbul and Nehalem versus a bounce back in spending? Which of those two items do you see sort of leading the way for you guys?

We feel basically a very positive [low]. The economy looks like we are continuing to recover slowly, although slowly but consistently. But mostly important because of our kind of (inaudible) architecture; I mentioned a couple of times 2 Twin 2 has been a very popular architecture people like to have and GPU again the quantity is ramping up very strongly. So with Nehalem and Intel next generation (inaudible) also coming very soon; AMD Istanbul, PCXI gen 2.0 just available about a quarter ago and the quantities here are quickly ramping up. Plus our 4G InfiniBand; we just made our 4TG QDR InfiniBand switch available about one month ago; all of those factors will grow our business.

Okay. And Howard, just I don't know if you have those unit numbers yet, but just as a last question here-- do you want to take a stab at what revenue levels you have to get back to then to hit the low end of your long-term operating model?

I think we're still looking at-- as I indicated before, they are long-term operating models; they're probably one to three years out. So if you extend our growth path on there, I think during the past five years prior to the economic upheaval, we were growing at about a 34%-32% clip on a CAGR basis and so again, as we extend out one to three years and get out of this economic recession that we've been in, and as Charles mentioned, get back on more of the trajection we were on previously.

Okay. Thank you, guys.

Alex, just as a follow up, 37,000 server units.

Okay; and the server components?

Subsystems and accessories are sitting at about 655,000.

Okay. Thank you very much.

(Operator Instructions). 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.

Thank you, ladies and gentlemen. This does conclude the Super Micro First Quarter Fiscal Year 2010 Conference Call. We do appreciate your participation. You may disconnect at this time.