超微電腦 (SMCI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer, Inc., Third Quarter 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 it has made available to participants, which can be accessed in a downloadable PDF format on its website at, again, www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

(Operator Instructions). As a reminder, this call is being recorded Tuesday, April 27th, 2010. A replay of this call will be available until midnight on May 11th, by dialing 888-203-1112 and entering conference ID number 4788740. 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. And now I would like to the conference over to Mr. Hayes. Please go ahead, sir.

Good afternoon and thank you for attending Super Micro's conference call on financial results for the third quarter fiscal year 2010, which ended March 31st, 2010.

Before we begin, I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On June 8th, we will attend the UBS Global Technology and Services Conference in New York, where we will present and participate in one-on-one meetings.

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 begin, I'll remind you that our remarks include forward-looking statements. There are 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 statement.

Most of today's presentation will refer to non-GAAP financial results and outlook. 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.

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

Thank you, Perry, and good afternoon, everyone.

Please turn to slide four.

First, let me provide you with the highlights of the third quarter. We are pleased that our third quarter revenue was $189 million or 4% higher, quarter-over-quarter, and 73% higher year-over-year. This result is another record high for Super Micro.

Non-GAAP net income was $8.9 million or 3.2% lower, quarter-over-quarter, and 266% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.21 per diluted share, compared to $0.72 last quarter or $0.06 last year.

Slide five, please. Even though the March quarter is seasonally soft for the industry, we were able to achieve another record high of quarterly revenue. This was the fourth straight quarter of increasing revenue and demonstrates the strength of our product lines and our brand recognition.

Our 1U twin and 2U twin-squared server lines, as well as storage and GPU lines were strong during the quarter. In this quarter, we also saw an upsurge in our data center (inaudible), which was equaling 5% of revenue. The data center (inaudible) is committed to (inaudible).

We are focused on this to increase our complete server solutions and to promote our brand name recognition, as well as to improve our scale. Improving our scale will make us a more competitive player in the long run and we are growing share in this market segment quickly.

During the quarter, we also saw customer demand building for solutions based on our new processor, Intel Westmere, the six-core processor, and Magny-Cours, the eight and 12-core processor from AMD, which were launched in mid and late March, respectively. These product launches occurred in the last few days of our quarter and we were not able to affect much in our revenue.

However, when these processors was finally launched, Super Micro was prepared with the broadest array of products in the industry and, therefore, we expect to see a positive revenue impact in the June quarter. In fact, we just launched a series of strong SuperServer product lines that optimizes the performance of multi-core processors.

As we look ahead to the remainder of calendar 2010, we believe that the technology refresh gives us an advantage on the new processors and that we are well positioned for growth. As we said before, Super Micro is a technology leader that will grow faster than the industry.

To be consistently growing, we continue to make investments in strategic areas. Currently our production capacity in Europe is in operation and continuing to ramp. In addition, this quarter we have just added a production capacity in Taiwan as stage one ramps to begin our system integration in Asia.

We will continue to add additional production capacity in Taiwan in later stages over the next few years. We may add employees (inaudible) carefully to meter the demand for our pipeline of opportunities in each geographic region. In particular, we have increased our R&D capacity, both in USA and Taiwan, in order to continue our technology leadership.

The last nine months of fiscal year 2010 have been the strongest in our history. Super Micro has strong momentum going into the fourth quarter, because of our growing brand strength, important OEMs with new Westmere and G34 product launches and growing revenue opportunities in both Europe and Asia.

Slide six and seven, please. During the quarter, we have begun production and delivery of the following products.

First, TwinBlade, featuring 20 DP nodes support in 7U array (inaudible), with 40 gigabit per second Infiniband or 10G Ethernet connectivity as options. In fact, we just won a highly competitive (inaudible) solution award and our in on April 20, which is the only national (inaudible) focused on blade-based solutions with (inaudible).

The high (inaudible) server solution equipped with regular-level, half-height and (inaudible) or in volume production in late March. Our new 1U and 2U enterprise optimized rack mount product lines, based on Intel and AMD newest processors and 10G Ethernet on both are shipping in volume since late March.

Our innovative double-sized storage provides high-density (inaudible) 25 inch hard-drive in 4U with the ability of (inaudible) and [stacked sites].

In the upcoming quarters, we will further demonstrate our technology leadership by launching the following new products.

First, new generation 4-way in volume production. One of our new generation 4-way systems is based on Intel Boxboro EX chipset and new Nehalem EX MP GPUs, which provide much higher memory and IO bandwidth than the previous generation of four-way systems.

Our eight-way systems will be in production by September quarter and targeted at the higher-end enterprise mission-critical applications with (inaudible) of huge memory capacity and tremendous computing power and our (inaudible) product line extension.

Our Super SBB storage (inaudible), which uses our Twin design concept that can incorporate (inaudible) storage solutions, and our cabling and airflow optimized rack, or SuperRack, will be in production by the end of May.

Also, our 10G switch for (inaudible) and stand-alone products will be ready for pre-production in mid June.

In summary, Super Micro had a strong third quarter with record revenues. We continue to invest in our research and development, as well as in our production capacity, especially in Europe and Asia new facilities in order to continue the momentum we are generating.

We have a strong pipeline of business opportunities in all of our geographies that make us feel very confident that we are in the technology leader position and that we are on a strong growth trend.

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

Thank you, Charles, and good afternoon, everyone. I'll focus my remarks on earnings, gross margins, operating expenses and similar items on a non-GAAP basis, which reflects adjustments to exclude stock compensation expense. Reconciliation of GAAP to non-GAAP is included in the financial statements which accompany 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 third quarter income statement. Please turn to slide eight.

Revenue was a record $189.3 million, up 72.8% from the same quarter a year ago and up 4% sequentially. The increase in revenue from last year was fairly widespread among our customer base, due to the improving economy. However, it was particularly strong in the distribution and reseller side. The sequential increase in revenue from last quarter was primarily due to the increase in sub-systems and accessory cards, such as memory and hard-disk drives, as well as increased sales to the Internet data centers. Slide eight.

Turning to product mix, the proportion of revenues from server systems was 33.6% of total revenues, which was a decrease from 39.1% a year ago and a decrease from 36% last quarter. ASPs for servers was about $1,500 per unit, which is up from about $1,100 per unit last year and up from about $1,400 last quarter.

The increase in absolute dollars of server products from a year ago was primarily due to improvement in the economy. The decrease in absolute dollars of server products sequentially was primarily due to the seasonally soft quarter for the industry and the introduction of new processor technology late in the quarter, offset, in part, by an increase in Internet data center sales.

We shipped approximately 43,000 servers in the third quarter and about 840,000 sub-systems and accessories. The increase in sub-system accessories was primarily due to memory and hard-disk drive shipments to our system integrators.

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, 59.4% of our revenues came from the US and 69.4% came from our distributors and resellers. Internet data center revenue was 8.5%, which was an increase from the prior quarter of 6.9%.

Slide 10 and 11. Non-GAAP gross profit was $29.4 million, up 78.3% from $16.5 million in the same quarter last year and down 4% from $30.5 million sequentially. On a percentage basis, gross margin was 15.5%, up from 15% a year ago, and down from 16.7% sequentially.

Price changes from Ablecom resulted in a positive 0.1% change to gross profit in the quarter, with total purchases representing about 19.9% of total cost of goods sold, compared to 18.1% a year ago and 26.5% sequentially.

The sequential decrease in gross margin of 1.2% primarily resulted from lower percentage of server solutions, a higher percentage of sales to Internet data centers and higher sales of sub-systems accessories such as memory and hard-disk drives. In addition, we saw more sales of existing technology through our distributors' retail channels while new solutions based on new processor technology introduced late in the quarter was being evaluated by customers looking for higher performance.

Slide 12. Operating expenses were $17.3 million, up from $14.6 million in the same quarter a year ago, and up from $16.4 million sequentially. As a percent of revenue, operating expenses was 9.1%, down from 13.4% a year ago, and up from 9% sequentially.

Operating expenses was up on an absolute dollar basis, year-over-year, primarily due to additional personnel expenses related to increase in headcount in R&D and sales and marketing, offset, in part, by NRE and customer-funded projects in R&D.

Sequentially, we saw an increase primarily in R&D expenses due to headcount increases and expenses associated with the rollout of new solutions surrounding the launches of Westmere and Boxboro EX solutions from Intel, as well as the G34 AMD processor launch. Sales and marketing expenses also increased due to promotional activity surrounding the launches of these new products.

Headcount increased by 74 sequentially to 983 total employees. Overall, we are investing in growth opportunities, both in the US and abroad, in order to leverage the opportunities which we have.

Operating profit was $12.1 million or 6.4% of revenues, up from $10.2 million or 553.4% from $1.8 million or 1.6% of revenues a year ago, and down $2 million or 14.2% from $14.1 million or 7.7% of revenues, sequentially. The decrease in operating profit sequentially was primarily due to a lower gross margin, as mentioned above. We are ramping resources overseas and expect the utilization to increase towards the end of the quarter, into the next quarter.

Next income was $8.9 million of revenue, up $6.5 million or 266.4% from $2.4 million a year ago and down $0.3 million or 3.2% from $9.2 million sequentially.

Our non-GAAP fully diluted EPS was $0.21 per share, up $0.15 from $0.06 per share a year ago and down $0.01 from $0.22 per share sequentially. The number of fully diluted shares used in the third quarter was 42,452,000. The increase of 1.9 million in diluted shares sequentially was primarily due to the impact of options which were previously underwater. Should the average stock price move at the same rate as last quarter, you may see similar additional shares added to the fully diluted shares.

The tax rate for the third quarter, on a non-GAAP basis, was 25.7% compared to a negative 44.3% a year ago and 34.1% sequentially. The decrease from last quarter's tax rate was due to the expiration of the statute of limitations on some of our tax reserves, as well as completion of our R&D studies, which increased the tax rate for this quarter.

The increase in tax rate from last year was due to the R&D credits being reinstated retroactively during the second quarter of fiscal '09. The R&D credit expired on January 1, 2010. Should the credit be reinstated retroactively, the Company should-- would adjust in the quarter the credit is reinstated. We expect the effective tax rate on a non-GAAP basis to be approximately 34.1% for the June quarter.

We are actively working on our international tax strategy, in conjunction with our plan to expand overseas, which we hope to lower our effective corporate tax rate in the next few years. We have received approval from Taiwan for a five-year tax holiday in which we will receive tax credits from investments made in Taiwan to offset our taxes payable in Taiwan.

Turning to the balance on a sequential basis, slide 13. Cash and cash equivalents in short and long-term investments were $73.2 million, which is down from $88.9 million in the prior quarter. In the third quarter, free cash flow was a negative $20.8 million and the net change in cash was a negative $15.5 million. The use of cash in the third quarter was for working capital, in the form of additional inventory to support the growth of the Company.

The Company has no debt.

For the nine month period, free cash flow was a negative $11 million and the net change in cash was a negative $3.6 million.

Slide 14. Accounts receivable increased by $9 million to $63.9 million and DSOs was 29 days, an increase of two days from the prior quarter. Inventories increased by $10.1 million to $144.4 million, with days in inventory at 80 days, an increase of 9 days from the 71 in the prior quarter.

Accounts payable decreased by $9.1 million to $103.5 million, with the days payable outstanding increased by 2 days to 62 days.

Overall, our cash conversion cycle was 47 days, an increase of 9 days from 38 days in the prior quarter.

Each of these balance sheet items points to a time of revenue growth, both domestically and internationally, as well as product transition. The Company is considering the purchase of land and buildings in San Jose and Taiwan of about $25 million. The Company is reviewing debt financing options for these investments, which will support future growth in the future.

Now for a few comments on outlook. As indicated previously, during the third quarter we saw continuing improvement in the economy, however the third quarter is typically seasonally weaker for the industry and there were new product introductions at the latter part of the third quarter from Intel and AMD, which tempered demand in the quarter. We have seen increased interest in the new products surrounding these launches and the fourth quarter is typically a seasonally strong quarter.

On margins, we continue to invest in our customer base and abroad in order to continue to build our economies of scale, while at the same time leverage our operating expenses as well as the additional margin from new products introduced during the third quarter.

Therefore, the Company currently expects net sales for the quarter ending June 30, 2010, of $192 million to $202 million. Assuming these revenue ranges, the Company expects non-GAAP earnings per diluted share of approximately $0.20 to $0.23 for the quarter.

It is currently expected the outlook will not be updated until the release of the Company's next quarterly earnings announcing. 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. Again, we are pleased with our strong performance and the record. Going into the fourth quarter we believe we have strong momentum based on our new Westmere and G34 product lines, which foster a new multi-core processor technology, with (inaudible) computing density and performance per dollar (inaudible). In addition, we have a strong pipeline of new products and business opportunities across the geographies where we have expanded.

We look forward to having a strong trend of growth to conclude this fiscal year in June and to lead us into the next fiscal year, as well.

Operator, at this moment we are ready for questions.

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

Good afternoon, gentlemen.

Hi, Michael.

Just a couple questions here. One, for starts, on sort of the gross margin trends. Obviously, I certainly understand the idea about being aggressive and taking some share. Can you kind of help me understand where you want to set the limits to that, sort of what kind of margin levels do you want to hold in terms of being aggressive and how we should think about these trends over the next quarter or two here?

Yes. In the last quarter, because of the new product introduction, as you may know, Intel just launched Westmere March 15th and AMD launched G34 March 30. So the new product launch, that kind of pushes things a little bit and for sure with new products happening this quarter, we expect June quarter's margin will be slightly better.

And, as well, last quarter, because most of the products we sold are very old products. That's why margins was a little bit lower.

With that, Howard, would you like to add anything?

Yes. Mike, if you take a look back in our history, also, you'll see that probably about 15% last year, this same time, coincidentally, was probably about the low point in the last couple of years.

Okay. I mean, I guess I'm just going to also, to sort of wrap this side of it up, thinking about sort of where you guys think that will trend, over time. I know you've historically been able to hit the sort of high teens. We're a couple hundred BPS away from that right now. Do you think that's something we can expand back towards? I mean, there was certainly a revenue level that would seem it will support that.

Yes, I think we're going to be continuing to build like we said overseas, build our economies of scale, improve our delivery of products. We certainly believe that all those things will contribute to our margins, going forward.

Okay. And then on-- the other question would be on the inventory. Obviously, you made some significant investments into that, working capital and what-not. Can you break down sort of the components of that a little bit and what you're seeing that inventory composed of and what level do you think you're going to be required at to run that inventory to support the business over the next quarter or two? Do you think that needs to expand further?

Last quarter because of that transition, again, we had to prepare old products and new products. That's why kind of we have a higher inventory (inaudible). However, after this transition, I believe our inventory level will be (inaudible).

I might just add to that, again, if you go back a couple of years to the last product transition we had, you'll see us typically build inventory when we're making a transition and then bring it back down to levels where we kind of maintain it on a DSO basis.

Okay. Thanks, guys.

Our next question comes from Doug Reid with Thomas Weisel Partners.

Thanks. I'll try to keep it to one and a followup. You mentioned in the release important OEM wins. I wonder if you had a little bit of color to how many, nature of them, and what the ramp rate on some of your new OEM relationships might look like?

Yes, I mean, as we shared with you a few quarters ago, we still have a couple of large OEMs and that's why last two quarters we spend a lot for engineering (inaudible) to create those for that. And now most of the products for these two OEM customers is migrating and we shipped some small volume in March quarter. June quarter we will start to ramp of (inaudible). So it's during, I believe, a certain volume and September quarter will be high volume production for those OEMs.

Okay, great. And then, Howard, any way you could quantify the relative impact on gross margin coming from the mix shift of components and sub-assemblies relative to the ramp rate or the increased percentage going to Internet customers? Just to get a sense of why gross margins are down sequentially.

I think, Doug, if you take a look at it, the biggest effect, I think, was the reduction in our server solutions products and within that, if you take a look at the data center, again, the percent of mix there, if you go down and compare it to the last quarter, you'll see that data center revenue of the server solutions business were primarily about 19% of that revenue category. And then next quarter, the next-- this current quarter, we had about 25% of our server solutions being shipped to the server solutions part of the business. So you've got a higher mix there.

In addition to it, we'll talk about the product transition, right? So the older-- it's kind of the older technology, as we're going through this product transition, are being sold out.

Okay. And just within that, though, I mean, are you seeing better margins on repeat business at some of these new data center customers?

What we're going to see is probably-- as Charles mentioned, we have a transition going on with the Westmere and Boxboro EX and some of the other new G34 products coming out. I think those will certainly be higher margins than what we expect and I think that's been built in to some of the forecasts we're giving, going forward.

Okay, great. Thanks.

And a question now from Glenn Hanus with Needham & Company.

Just on the gross margin, again, I didn't quite hear what you said on the June outlook for gross margin. Did you-- did Charles say that you thought you would see some recovery this quarter?

Yes, because both Intel Westmere and AMD G34 product lines will be in high volume production this quarter, the June quarter, I mean. So new products, for sure, we always have a better margin.

Right. Okay. Could you just talk a little bit more about operating expenses, perhaps? Should we look for modest growth in operating expenses in June and kind of how should we think about operating expenses, going forward?

Yes, Glenn, I think we talked about ramping a bit of R&D expenses to prepare for the launch of the products. With those launches of the products kind of behind us, we're going to be a little bit more modest this quarter with regard to our increases.

Okay, thank you.

And a question now from Dinesh Morjani with Broadpoint AmTech.

Hi, guys. Congratulations on the record revenue. Could you give us a little bit more color on your international ramp, specifically if you're looking to add another line to your European facility any time soon? And then maybe give us a little bit more color on your expansion in Taiwan and how large do you see this operation relative to your European operation as you exit the year? And then how we should be thinking about cost savings?

Okay. Yes, the production facility in Europe has been ready for production for three, four months and the quantities are ramping up (inaudible). So basically we support (inaudible) for our large customer (inaudible) and, again, the volume is growing.

As to Taiwan, we have lots of customers in Asia and they are kind of asking for local support integrated in local, instead of integrated in Silicon Valley and shipped to them by air, right? So with Taiwan production line just ready this month, we will be able to start servicing customers in Asia with local integration. And then, for sure, we'll have lower shipping costs and also speed up (inaudible) to customers.

And investment in Taiwan will be gradual, mostly, so we won't have a big sharp investment in Taiwan, but relatively, it will be gradual. It depends on the demand.

Okay, thanks. And then just a follow-up question regarding the new microprocessor products from Intel and AMD in late Q1. Do you see significant pent-up demand for servers based on these new products?

For sure. I mean, people always like a newer product, especially a newer CPU, always performs faster with similar cost, right? And, again, with both Intel and AMD product lines (inaudible) now, we do have a better feeling, better confidence, for kind of optimizing.

Great. Thank you.

(Operator Instructions). And now we'll go to Alex Kurtz with Merriman & Company.

Thanks, guys. For taking the questions. I was just going to followup with Glenn's earlier question about OpEx, Howard. Are we looking for under $1 million or so of OpEx or is it going to be much less than that from a sequential growth basis?

I think we're going-- we had the additional headcount come in kind of mid-stream, so you're going to have some push for the full quarter of those headcount increases we've had during the quarter in the OpEx. There'll be some increase from that. I don't believe it will be at a level that we had this past quarter.

Okay, so somewhere under $1 million is sort of what you're thinking?

Well, that's what the increase was this past quarter. That's correct.

Right. And so less than that. And obviously this is a step function down in gross margin. I know you guys-- the impact of Internet Data Centers has been-- I understand the historic precedent there, but, Howard, can you just clarify for all of us here, because this is such a change, quarter-over-quarter, you are expecting gross margin to recover next quarter, back to, say, the 16%-plus level?

Well, I think if you look at our-- like our top-line guidance and then the revenues and the EPS at the bottom, and the operating expenses basically being about flat to lower, the gross margins, we've already stated, we'll go up.

Right. Okay. And just a quick last one here. On that major OEM win that you announced last quarter on your last call, could you talk about the-- sort of how that's progressing, whether or not any of that-- any of the guidance is included with that OEM contributing in the June quarter here? And what shall we think about, going into fiscal 2011?

For OEMs, for sure, they need a time to ramp up, because there are lots of SKUs, and that's why last quarter-- the last two quarters we increased lots of R&D expense and R&D headcount. But (inaudible) is, yes, it's ready for ramp up. Howard, do you have those numbers with you?

We've never shared the volume on this. Obviously, we do think it's a significant OEM for us. We are increasing our capacity to accommodate that, both in Europe and in Asia. So, again, we do believe it's significant, but, again, it's just ramping up, as Charles has indicated.

You guys took the time to call it out last quarter, Howard.

Yes.

So we're calling it out again here. I mean, is that going to be something you expect to contribute 5%, 10% of revenue going into next year or it's just too soon to tell?

I think, Alex, we believe it's going to be significant. I'm not sure if it's going to hit the 10% customer level. Obviously, we'd love to hit a 10% customer level, but, again, hopefully the rest of our business grows at the same rate, too.

Okay, but for the current quarter, no expectation that it's going to be a meaningful revenue contribution?

There'll be some, obviously. We just-- again, Charles mentioned we had some ramp beginning last quarter and it's going to continue to ramp this quarter.

Okay. All right, thank you.

And at this time it appears we have no further questions. I would 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 this quarter. Thank you, everyone. Have a great day.

Thank you, again, ladies and gentlemen, and this does conclude the Super Micro Quarter Fiscal Year 2010 conference call. We do appreciate your participation and you may disconnect at this time. Thank you.