超微電腦 (SMCI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Super Micro Computer, Inc. second quarter end fiscal year 2010 financial results conference call. One note that today's call is being recorded.

And now I'd like to turn the conference over to Mr. Perry Hayes, Senior Vice President of Investor Relations. Please go ahead, sir.

As a reminder, this call is being recorded, Tuesday, January 26, 2010. A replay of the call will be accessible until midnight, February 9, by dialing 1-888-203-1112 and entering the conference ID number 6448603. International callers should dial 1-719-457-0820.

With me today are Charles Liang, Chairman and Chief Executive Officer, and Howard Hideshima, Chief Financial Officer.

And now I would like to advise you of upcoming investor conferences in which Super Micro will be participating.

On February 9, we will attend the Technology and Telecom Conference in San Francisco sponsored by Thomas Weisel Partners. And we will present and participate in one-on-one meetings.

On February 23, we will attend Piper Jaffray's Clean Technology Conference in New York, where we will present and hold one-on-one meetings with investors.

Our presentations at both conferences 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 2. 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, our Form 10-k for fiscal 2009, and our other SEC filings. All of those 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 statements.

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. 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.

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 second quarter. We are pleased that our second quarter revenue was $182 million, or 22.5% higher quarter over quarter and 41.5% higher year over year. This result is a record high for Super Micro. Non-GAAP net income was $9.2 million, or 58.4% higher quarter over quarter and 37.2% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.22 per diluted share, compared to $0.15 last quarter or $0.17 last year.

Slide 5, please. Last quarter was our strongest quarter on record. Not only was our revenue at record high for the quarter, but we also achieved a second consecutive quarter of greater-than-20% growth, making the beginning of fiscal 2010 our [fastest start over].

We grew in all product categories, especially in Nehalem-based server products, storage, blades, and GPUs. We also grew in all geographies, which demonstrates the increased focus we had in European and Asian business. Our growth is a result of the strongest and the most complete product line that we have ever had at Super Micro. With such strong products, we have been asked to competitively bid by more and more companies and be in larger and larger opportunities. Super Micro continues to benefit from our offerings that our customers value in this economy, especially on maximizing performance per watt and per dollar.

Clearly, the December quarter provides evidence of [a refresh] cycle that is underway. Due to the recession, companies extended the useful life of their IT system longer than usual. With the latest system architecture and processor technologies that provide companies with higher performance and lower energy cost, the total cost of ownership is reduced to the extent that ROI has dramatically improved.

As an example, in (inaudible) Super Micro wins, our client want an HPC cluster to access the (inaudible) and the computing density. We provide the client with our four-way blade solution containing 240 processing cores in a 7U blade enclosure combined with our own QDR 40-gigabit-per-second InfiniBand switch. This solution enabled the client to save 25% in energy [and coding] costs with a traditional [document] server.

Because of our challenging, new economic reality and the savings IT departments must generate, we expect that this IT refresh cycle will continue throughout 2010. And we expect that Super Micro's value proposition will allow us to continue our strong growth.

During the quarter, we saw momentum continue to build for our products, such as our Nehalem processor-based solutions; our Twin family of products, including our Twin Squared and TwinBlade; storage, which was especially strong in this quarter; and GPU solutions, which continue to grow strongly.

While the first half of this fiscal year was very strong, we traditionally have an even stronger second half of fiscal year. With our growing brand strength, important OEM wins, new product launch, and a growing revenue opportunity in Europe and Asia, we have a strong position to explore in the coming quarters.

In particular, as we have previously discussed, we are building up integration capacity in Europe, which will serve new OEM kinds as well as provide a standard service for our general customer base in Europe. We will reach significant capacity by the middle of this year in Europe.

In the upcoming quarters, we will begin delivery of some important new products that will further extend our leadership and innovation in server technology. This product line are TwinBlade. We extend our Twin architecture to our SuperBlade and were able to double the density, providing 20 DP node support in a 7U blade enclosure with 40-gigabit-per-second InfiniBand or 10G Ethernet connectivity as options.

Our new-generation 1U and 2U enterprise optimized (inaudible); therefore, optimize for enterprise virtualization applications, including 18 DIMM, 94% Platinum Level, high-efficiency, redundant power supply, more I/O capacity, GPU capability, and 100% cooling redundancy. And our optimized rack cabinet solution for datacenter, which provide a front- and rear-side access for (inaudible) device, user-friendly cabling, and front and rear and side module expansions-- Our new-generation four-way MP systems, one of the new-generation four-way systems will be based on Intel Boxboro chipset and new Nehalem EX MP CPUs, which provides a much higher memory and I/O bandwidth than the previous-generation, four-way systems.

And, then, the new processor technologies. As you may know, Intel Westmere 6-core architecture will launch in middle of March. And AMD G34, code name Magne-cours, 8- and 12-core architectures, also launch in the end of March. And our storage product line expansion, super SBB storage bridge bay, which uses our Twin design concept that can incorporate or bridge the SATA and SAS storage solutions.

And our new innovation, the double-sided storage product, will support up to 45 3.5-inch (inaudible) hard drive per 4U enclosure instead of 24 hard drives supported from competition.

In summary, we continue to expand the Super Micro brand as a technology leader. Our pipeline of technology innovation and our (inaudible) product development capability make us feel very confident that we are in the technology-leading position and that we are on a strong growth trend.

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 reflects adjustments to exclude stock-compensation expenses, reconciliation of GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release and in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with a review of the second quarter income statement. Please turn to slide 8.

Revenue was a record $182 million, up 41.5% from the same quarter a year ago and up 22.5% sequentially. The increase in revenue from last year was fairly widespread among our customer base, which we believe was primarily attributable to the continuing improvement in the global economy and new products which were introduced since then. The sequential increase in revenue from last quarter was primarily due to increases in our storage [UIO] and Nehalem-based products.

Slide 9, turning to product mix. The portion of revenues from server systems was 36% of total revenues, which was a decrease from 41% a year ago and an increase from 34.5% last quarter. ASPs for servers was about $1,400 per unit, which is up from $1,300 per unit last year and comparable to the $1,400 last quarter. The increase in absolute dollars of server products from a year ago and sequentially was primarily due to increased shipments of servers to OEM and end customers. We shipped approximately 48,000 servers in the second quarter and 803,000 subsystems and accessories.

We continue to maintain a diverse revenue base, with none of our over 400 customers making up more than 10% of our net sales in the second quarter. Furthermore, 57.6% of our revenues came from the US and 68.5% from our distributors and resellers. And our datacenter revenue was 6.9%, which was a decrease from the prior quarter of 7.3%.

Slides 10 and 11. Non-GAAP gross profit was $30.5 million, up 25.7% from $24.2 million in the same quarter last year and up 23.6% from $24.7 million sequentially. On a percentage basis, gross margin was 16.7%, down from 18.9% a year ago and up from 16.6% sequentially. Price changes from AbleComm resulted in no change to the gross profit in the quarter, with total purchases representing approximately 26.5% of total cost of goods sold, compared to 22.8% a year ago and 22% sequentially. The increase sequentially was primarily due to higher levels of inventory for future demand. The sequential increase in gross margin of 0.1% primarily resulted from a higher percentage of sales of complete server solutions, as noted above, and a lower percentage of sales of subsystems and accessories and internet datacenter (inaudible).

Operating expenses were $16.4 million, up from $15.6 million in the same quarter a year ago and up from $15.6 million sequentially. As a percentage of revenue, operating expenses was 9%, down from 12.2% a year ago and down from 10.5% sequentially. Operating expenses was up on an absolute dollar basis year over year, primarily due to additional personnel expenses related to increased headcount in R&D and sales and marketing, offset in part by a higher NRE and customer-funded projects in R&D. Sequentially, we saw an increase, primarily in sales and marketing expense, due to higher commissions and bonuses to sales personnel, as well as higher coop marketing funds due to increased level of revenue.

R&D expenses were about the same, due to higher NRE and customer-funded projects, offset by personnel expenses related to increase in headcount and bonuses during the quarter. During the quarter, we had about $1 million of additional customer-funded projects, which reduced the overall R&D expense by this amount. We do expect to have this this quarter but at a lower rate. Headcount increased by 24 sequentially, to 909 total employees.

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 $14.1 million, or 7.7% of revenue, up $5.5 million, or 63.5%, from $8.6 million, or 6.7% of revenues, a year ago and up $5 million, or 55.1%, from $9.1 million, or 6.1% of revenues sequentially. The increase in operating profit shows our ability to grow our top line while still maintaining control of our expenses.

Net income was $9.2 million of revenue, up from $2.5 million, or 37.2%, from $6.7 million a year ago and up $3.4 million, or 58.4%, from $5.8 million sequentially.

Our non-GAAP, fully diluted EPS was $0.22 per share, up $0.5 from $0.17 per share a year ago and up $0.07 from $0.15 per share sequentially. The number of fully diluted shares used in the second quarter was 40,531,000. The increase in diluted shares was primarily due to the impact of options which were previously under water.

The tax rate in the second quarter in the second quarter on a non-GAAP basis was 34.1%, compared to 20.8% a year ago and 35.1% sequentially. The increase from last year's tax rate was due to the R&D credit being reinstated retroactively during the second quarter of fiscal 2009. The R&D tax credit expired on January 1, 2010. Should the credit be reinstated retroactively, then the Company would adjust in the quarter if the credit is reinstated. We expect the effective tax rate on a non-GAAP basis to be approximately 35% for the March quarter.

We are actively working on our international tax strategy in conjunction with our plan to expand overseas, as mentioned by Charles above, which we hope lower our effective corporate tax rate in the next few years.

Turning to the balance sheet on a sequential basis, slide 13, cash and cash equivalents and short- and long-term investments were $88.9 million, which is up from $85.2 million in the prior quarter. In the second quarter, free cash flow was a positive $900,000, and the net change in cash was a positive $8.7 million. The cash balance reflects the redemption at par of $5.3 million of auction-rate securities. Total auction-rate securities held by the Company is approximately $6.6 million at the end of December. The Company has no debt. For the six-month period, free cash flow was a positive $9.9 million, and the net change in cash was a positive $12 million.

Slide 14. Accounts receivable increased by $4.8 million to $54.9 million, and the DSO was 27 days, a decrease of three days from the prior quarter.

Inventories increased by $34.2 million to $134.3 million, with the days in inventory at 71 days, which is the same as prior quarter.

Accounts payable increased by $26.3 million to $112.6 million, with the days payable outstanding increasing by one day to 60 days.

Overall, our cash conversion cycle days were 38 days, a decrease of four days from the 42 days in the prior quarter.

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

Now for a few comments on our outlook. As indicated previously, during the second quarter, we saw continuing improvement in the economy. But, more importantly, our customers and partners continue to see the benefits that our solutions can provide them. We see this trend extending and further expanding into other markets and verticals and new customers.

However, the third quarter is typically a seasonally weaker quarter for the industry. In addition, there will be new product introduction at the latter part of the third quarter from Intel and AMD, which could temper demand in the quarter. We have tempered our forecasts accordingly.

Our margins-- we will continue to invest in our customer base and (inaudible) in order to continue to build our economy of scale while at the same time leveraging our operating expenses. Therefore, the Company currently expects net sales for the quarter ending March 31, 2010 of $175 million to $185 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.18 to $0.21 for the quarter.

It is currently expected that the outlook will not be updated until the release of the Company's next quarterly earnings announcement. Notwithstanding subsequent developments, however, the Company may update the outlook or any portion thereof at any time.

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

Thank you, Howard. The first-half beginning to our fiscal 2010 has been very strong with record results for Super Micro. Having our strong product (inaudible) and growing brand name recognition, we are well positioned to continue this record pace into the second half of this year.

I will now turn the call back to Perry.

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

Thank you. (Operator instructions). Doug Reid, Thomas Weisel Partners.

Hi. This is [Vivik Manipardem] in for Doug Reid. It would be great to get your thoughts on what you felt the pricing environment was in the current quarter and whether you felt there was a lot of pressure to reduce prices in order to win business.

Yes. We feel the competition continue very strong and competitors (inaudible) very aggressively. However, because we have a very strong, new product line - new architecture, another GPU, another Twin Square-- so I believe we can maintain (inaudible) margin. We believe it's healthy for us. And, again, yes, we try to be aggressive in price to grow our market share.

Speaking of the margin, would you all be able to provide some guidance regarding what you expect margins to be in the March quarter?

March? Indeed, again, (inaudible) still new and still popular. So I don't feel we will have a challenge here. So it should be busy, and it should be growing smoothly.

Okay. Great. And just one follow-up. Would you all share your opinion on how you have seen component prices react in the December quarter?

Yes. There are lots of shortage here because of the recovery of the economy. So we're facing some shortages but not a big issue, because we used to keep a very aggressive inventory.

Okay. And when you say shortage, could you specify which particular components?

You know, it's across the whole product line - memory, hard drive, even capacitor, (inaudible). But, again, because we keep a good [sale team inventory], so the impact to us should be reasonable-- acceptable.

Okay. Great. Thank you so much.

(Operator instructions). Alex Kurtz, Merriman & Co.

Congratulations on the great quarter. Howard, can you just talk a bit about the strength in the servers quarter over quarter? What verticals and what products lines really stood out for you guys?

I think, Alex, as Charles mentioned earlier, the storage area was pretty strong for us this quarter, as well as GPUs. We continue to gain traction there. Obviously, our Nehalem line is very strong also.

And are you starting to see the GPUs start to kick in on ASPs yet? Is that starting to help the overall ASP as well as margin?

I think so, Alex. Again, we just introduced that probably about a quarter or so ago. So it's just at the very beginning of its ramp-up for us. But we've seen very good traction in it.

Okay. And, if you could just revisit for us what you think your long-term growth profile is for the Company and, behind that, the-- just remind us what the target operating model is and sort of what the timing of that could be. Do you see that as something that you could accomplish exiting fiscal 2011? Just some updated color on that-- behind these strong results today. Thank you.

Yes. For March quarter, because both Intel and AMD have a new CPU-- kind of Westmere and G34-- both will be launched by March-- end of March, indeed. So we believe we'd like to be conservative for March quarter. But, you know, with so many new technologies, second half of this fiscal year should be a brighter year to us.

But, Charles, do you think you guys can get back to those 30% kind of growth rates again over the next couple years?

At this moment, we feel very confident.

And, Howard, just on the target operating model and sort of the timing around that?

Right. As we said before, Alex, the target operating model has, basically, an operating margin of about 9% to 12%, gross margin of about 19% to 22%. And we've said it's about one to three years out. We still feel confident.

Okay. So no comment on timing. Thank you, guys.

Glenn Hanus, Needham & Company.

Just a follow-up in clarifying the gross margin. You feel like gross margins going forward can be flat to slightly up. And I don't want to put words in your mouth. And then just sort of the puts and takes on the next quarter on the gross margin.

Yes. You're right. As Charles mentioned, we feel it's-- the gross margin is going to be very stable. I think the puts and takes are that it will be, as we ramp up some of the European and overseas expansion, we'll get some benefits from that as we bring that facility up, from reducing our logistical costs and our shipping costs. Obviously, new product introductions typically help us.

Then on the other side of that would be growing our market share. It's still important to us-- basically, growing our economies of scale.

Okay. Great. Thank you.

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

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

Thank you, ladies and gentlemen. That does conclude the Super Micro first (sic - see Press Release) quarter fiscal year 2010 conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.