超微電腦 (SMCI) 2010 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 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 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. (Operator Instructions).

As a reminder, this call is being recorded, Tuesday, August 3rd, 2010. A replay of the call will be accessible until midnight, August 17th, by dialing 1-877-870-5176 and entering conference ID number 5174377. International callers should dial 1-858-384-5517.

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 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 financial results for the fourth quarter and full fiscal year 2010, which ended June 30th, 2010. Before we begin, I'd like to advise you of upcoming investor conferences in which Super Micro will be participating.

On September 16th, we will attend ThinkEquity's Annual Growth 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 also 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, our 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 statements.

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.

Now I'll 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 our fourth quarter. We are pleased that our fourth quarter revenue was $202 million or 6.5% higher, quarter over quarter, and 63% higher, year-over-year. This result is another record high for Super Micro.

Non-GAAP net income was $9.11 million, or 1.6% higher quarter over quarter, and 141% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.21 per diluted share compared to $0.21 last quarter or $0.10 last year.

Slide five, please. Now I would like to share with you our achievements during the past fiscal year. Fiscal year 2010 was a remarkable year of growth for Super Micro and this quarter represents our fifth straight quarter of increasing revenue and our fourth straight quarter of record high revenue. We have achieved these goals because we offer the best product line in our history that has been optimized to the new processor technologies that were launched during the past year.

In addition, we have benefited by customers who took advantage of the newer technologies to improve their return on investment by investing in Super Micro technology, which offers the best performance, best performance per watt, performance per dollar, performance per square foot and the lowest total cost of ownership. We expect this trend to continue.

This past year we have continuously invested in the growth of Super Micro in terms of expansion of our operation, both at headquarters and overseas. We have begun further integration operations in our Netherlands facility and in Taiwan, in support of our OEMs and local customers.

With that, we have increased our server integration facility and capacity during 2010 by 50%. And we are planning to increase more this year, when the demand increases.

In fiscal year 2010, Super Micro led the server industry in technology and architectural innovation. We continue to grow our strong product line. We launched our award-winning Twin Blade, our resource-optimized server, our double-sided storage server -- up to 45 3.5-inch hard drives in a 4U enclosure -- our cable and airflow optimized SuperRack, our new generation Twin servers, our new GPU servers and our Storage Bridge Bay product lines.

In addition, we continue to have the broadest array of servers available for the recent launch of 6- to 8-core Intel Westmere processors, as well as for 8- to 12-core AMD Magny-Cours G34 processors.

In the last quarter, one of our engineering focuses was on the high-end 8-way system design. We have effectively expanded our server building blocks for scale in the high-end server solutions. These building blocks, which included (inaudible) CPU and memory module, a 4U optimized chassis and redundant (inaudible) efficiency, a 2,200-watt power supply, can also be used for other similar large and more powerful systems architecture in the future.

The current 8-way system in development will be capable of supporting 8 Nehalem or Westmere-EX processors, 2 terabytes of memory and 11 PCI-Express expansion slots. It's ideal for high availability, (inaudible) or back-end mission-critical applications.

Our innovative technology leadership, together with our first-to-market advantage again helped us to win market share in fiscal year 2010. We continue to outpace our competitors by growing annual revenue by 43% last year over 2009. We have won exciting new business with major OEM HPC customers, including university, national and international laboratories, data centers and many high-value-add (inaudible).

Our customer base is consistently growing and we are winning both in domestic and international markets and in key verticals. Growth is a strategic goal for Super Micro because it allows us to respond to customer demand on a global scale. Achieving our revenue goals allows us to further improve our operational efficiency, especially in Europe and Asia. Growth also allows Super Micro to gain economic scale for better component cost from vendors, allowing us to become more cost competitive and thus have a higher profit margin.

Especially to vendor pricing and allocation, in 2010, our growth in revenue-- in volume purchasing positioned us to become a source for components to an increasing number of our channel customers. This represents an additional source of revenue that is lower margin in the short run, but allows us to further penetrate these customers and offer them more comprehensive service, such as system integration, performance optimization and product quality warranty and service in the long run.

During last quarter, we were able to meet customer demand, but due to certain component shortages and allocation, our margins were impacted. However, the vendor relationship and economical scale improvements will help us to improve our cost and profit margins in the new and long-term future.

This past year, we continued to invest in our foundation in both R&D and operational facilities, both at home and overseas. During the past year, Super Micro increased headcount by 20%, with half of the increase in R&D, while most of our competitors kept flat in headcount.

Super Micro is a still young and quick-growing company, which means we have a different manpower requirement than older and bigger companies. Although the headcount we add has some impact on our profit margin performance, it is good, however, very good strategy to help us continue our pace and trend of growth in the future.

Nevertheless, while we grow our headcount, we are achieving a higher rate of productivity per employee, as evidenced by our revenue per employee increase of roughly 27% in the fourth quarter, compared to fourth quarter a year ago.

In 2010, we invested in our production capability overseas to better service our customers in their local markets. In support of local OEMs and major customers, we started our server integration operation in our Netherlands facility, (inaudible) but with overseas production. Later in the year, we started our Taiwan facility to support our growing Asian business. With that, we have increased our company-wise total server integration capacity during 2010 by roughly 50% and we are planning to increase more in the coming years, when needed.

The investment in new operations is necessary for our future growth, which will come from regions beside the US market. We have been carefully managing the investments and expense in this new operation by monitoring the headcount and balancing resources to meet revenue expectations. As these operations ramp to higher volume capacity, we will start to see higher capacity utilization and cost absorption, leading to a strong margin performance.

In addition, the overseas expansion will benefit further by lowering our supply chain costs and providing us access to lower tax rates. Slides six and seven, please.

During the past four quarters, Super Micro had (inaudible) a product line that continues to have the most innovative technology in the server industry, along with some new developments.

Our leading technology includes, first, our updated Twin Server architecture across 1U and 2U platforms, which continues our leadership momentum to a new generation.

Our award-winning Twin Blade, featuring 20 DP node support in a 7U blade enclosure, with 40 gigabytes per second InfiniBand or 10 gig Ethernet connectivity as options.

Our GPU-optimized product line is 1U and 4U platforms that provides extreme performance in calculation-intensive applications. Also, our new 1U and 2U enterprise-optimized rack mount product lines, optimized for enterprise virtualization-based applications are featuring the latest Intel and AMD-- the newest processors and 10G Ethernet on board.

Our ATOM server line, featuring low-power, low-noise and small form factors optimized for embedded and server appliance applications.

Our innovative, double-sided storage provides higher density, again, 45 piece 3.5-inch hard-drive in 4U, with the ability of [hot swap] from [either side].

One of the new generation 4-way-- new 4-way systems is based Intel Boxboro EX chipset and new Nehalem-EX MP CPUs, which provide a much higher memory and higher bandwidth than the previous generation.

Our 8-way system will be targeted at high-end enterprise mission-critical applications with the need of huge memory capacity and tremendous computing power.

Super SBB Storage Bridge Bay, which uses our twin design concept that can incorporate or bridge SATA-plus and fibre-channel storage solutions.

Also, our cabling and air flow optimized SuperRack is ideal for high density and complicated cabling rack mount configurations.

Our (inaudible) 10G switch for (inaudible) and (inaudible) are in the leading position for the industry while we enter the 10G Ethernet era.

Last, our MicroCloud power line, optimizes for cloud applications in an extremely low-power-consumption configuration.

As we close fiscal 2010, we are very pleased to report that while we continue to invest in R&D and new products, in our people and in new operations in Europe and Taiwan, we again continue our 17-year trend of increasing our profitable results.

For more specifics on the fourth quarter, let me turn it over to 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 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 fourth quarter income statement. Please turn to slide eight.

Revenue was a record $201.7 million, up 63.4% from the same quarter a year and up 6.5% sequentially. Revenue for the fiscal year was a record $721.4 million, up 42.7% from the same 12-month period a year ago.

The increase from last year was fairly widespread among our customer base, which we believe was primarily due to the recovery in the global economy. The sequential increase in revenue from last quarter was primarily due to increased sales of sub-systems and accessories, such as server boards, memory and chassis.

Slide nine. Turning to product mix, the proportion of revenue from server systems was 32.2% of total revenue, which was a decrease from 36.7% a year ago and 33.6% last quarter. ASPs for servers was $1,400 per unit, which is the same as last year and down from $1,500 per unit last quarter. We shipped approximately 47,000 servers in the fourth quarter and 956,000 sub-systems and accessories.

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, 60.9% of our revenues came from the US and 61.6% from our distributors and retailers. Internet data center revenue was 6.9%, which was a decrease of 1.6% from the prior quarter.

Slides 10 and 11. Non-GAAP gross profit was $31.1 million, up 50.7% from $20.6 million in the same quarter last year and up 5.8% from $29.4 million sequentially. On a percentage basis, gross margin was 15.4%, down from 16.7% a year ago and comparable to the 15.5% sequentially.

Price changes from (inaudible) resulted in a positive 1 basis point change to gross profit in the quarter, with total purchases representing 14.7% of total cost of goods sold, compared to 19% a year ago and 19.9% sequentially.

The year-over-year decrease in gross margin resulted from an increase in sales of sub-systems and accessories due to increased sales to distributors, retails and system integrators, who previously bought their own accessories and are now purchasing more of the total solution from us and assembling themselves.

Sequentially, gross margins were comparable. The primary effect on gross margin in the quarter resulted from higher margins on our server solutions as a result of the transition to newer products, continued offset, in part, by reductions in the percentage of revenue coming from server solutions, as well as inventory variances associated with the decrease in cost of some of the parts which we purchased, as well as an overall reduction in our inventory, which occurred in the quarter, constraints in inventory-caused delays in delivery of products such as server solutions. This is reflected in the lower percentage of server solutions sales on a sequential basis. Our standard margin did, in fact, go up for the quarter, which were offset by the factors mentioned above.

Customers continue to come to us to get the leading application-optimized server solutions.

Slide 12. Operating expenses were $18 million, up from $15.2 million in the same quarter a year ago and an increase from $17.3 million sequentially. As a percentage of revenue, operating expenses was 8.9%, down from 12.3% year over year, and down from 9.1% sequentially.

Operating expenses was higher on an absolute dollar basis, year over year and sequentially. We saw year-over-year increases in absolute dollars, primarily, in R&D, as we continued to invest in this headcount to drive our innovation and product portfolio. Sales and marketing also increased, primarily due to growth in headcount to support the growth in revenue and marketing of new products.

Overall, our productivity for the Company increased. Revenue per head increased from $600,000 per head to $760,000 per head for the year.

Sequentially, we saw an increase in operating expenses of about $700,000, primarily in R&D expense of about $600,000, related to salary and benefits associated with headcount increases. The Company's headcount increased by 53 sequentially, to 1,036 total employees, compared to 74 we added in Q3.

Overall, we have maintained good control of our operating expenses, while, at the same time, maximizing our opportunities for investing in our future. While others chose to reduce their head counts, we chose to increase ours by 20% last fiscal year, to invest in our future and build strength. Had we chosen a similar path like our competitors, we would have made more today, but at the expense of our future.

Operating profit was $13.1 million or 6.5% of revenue, up by $7.7 million or 141.6% from $5.4 million a year ago and up $1 million or 8.2% from $12.1 million sequentially.

Net income was $9.1 million or 4.5% of revenue, up $5.3 million or 140.7% from $3.8 million a year ago and up $0.1 million or 1.6% from $8.9 million sequentially.

Net income for the fiscal year was $33.1 million, up 55.5% from $21.3 million for the same 12-month period a year ago.

Our non-GAAP fully diluted EPS was $0.21 per share, up $0.11 from $0.10 per share a year ago and the same as the $0.21 per share sequentially. The number of fully diluted shares used in the fourth quarter was 43,683,000. The increase in diluted shares was primarily due to the impact of options which were previously underwater and the effect of RSUs previously granted.

Our non-GAAP fully diluted EPS was $0.78 per share, up $0.24 or 44.3% from $0.54 per share in the same 12-month period a year ago.

The tax rate for the fourth quarter on a non-GAAP basis, was 30.2% compared to 28% a year ago and 25.7% sequentially. We expect the effective tax rate on a non-GAAP basis to be approximately 33% for the September quarter, carried through the balance sheet on a sequential basis.

Slide 13. Cash and cash equivalents in short- and long-term investments were $79.4 million, up $6.2 million from $73.2 million in the prior quarter and down $5.6 million from $85 million at the end of fiscal 2009.

In the fourth quarter, free cash flow was a negative $13.4 million, which reflected the purchase of buildings for $18.5 million in June. The net change in cash was a positive $5.9 million for the quarter.

Slide 14. Accounts receivable increased by $9.1 million to $73 million and DSOs was 31 days, an increase of 2 days from the prior quarter.

Inventories decreased by $8.8 million to $135.6 million, with the days in inventory decreasing by 5 days to 75 days. The decrease in inventory was due, in part, to some delays in receiving parts at the end of the quarter, which delayed some shipment of servers.

Accounts payable decreased by $8.1 million to $95.4 million, and the days payable outstanding decreasing by 8 days to 54 days, primarily due to decreases in inventories mentioned above.

Our cash conversion factor cycle days were 52 days, an increase of 5 days from 47 days in the prior quarter.

Now for a few comments on outlook. As indicated previously, during the fourth quarter we saw continued improvement in the economy and the ramping of sales from the latest technology introductions. We expect to see continued ramping of these products, as well as the ramping of our facilities in (inaudible) and Taiwan.

Both these factors should improve our profitability, however September is seasonally a flat quarter for the industry. Therefore, the Company currently expects net sales for the quarter ending September 30th, 2010, in a range of $200 million to $210 million. Assuming this revenue, the Company expects non-GAAP earnings per diluted share of approximately $0.21 to $0.25 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. While we are pleased that 2010 was a remarkable year of success and growth for Super Micro, we now look forward to a strong fiscal 2011. With our established operations in the Netherlands and Taiwan, we will take advantage of lower costs of supply chain and logistics costs to improve our margins. Also, at these operations ramp to full capacity, we will improve our productivity and thus improve our profitability.

Over the past year, we have also invested in product development for several key partners and in the coming year we expect to see strong sales from ramping of business from those projects. With our award-winning Twin Blade now launched, in fiscal 2011 we also expect to see consistent growth in our blade servers.

Also in 2011, we expect that our high-end product line for enterprise and mission-critical application customers will provide revenue and net margin upsides from new markets. Therefore, as we begin fiscal year 2011, we are well positioned to execute on our strategy to grow our revenue, operations and scale and to improve our profitability in the upcoming year.

Operator, at this time, we are ready for questions.

Thank you, sir. (Operator Instructions). And we'll go first to Alex Kurtz with Merriman and Company.

Yes, thanks for taking the question. Howard, I think it would be helpful to sort of quantify the impact from the components business that you talked about, the pass-through business at lower margin. Can you give us a sense of percent of revenue quarter over quarter and how that trended from the last quarter to the June quarter?

Sure, Alex. With regards to our sub-system accessory business, you'll see that last quarter we were basically down a bit. As I mentioned on the call, our revenue from server systems went to 32.2%. That would make, then, the accessory and sub-systems business being the balance of that, which would be about 67.8%.

What I meant, Howard, last quarter there was some pass-through business on memory and disks and that-- you guys called that specifically. And it sounds like that business was-- had increased as a percent of the mix. Inside the component mix, can you talk about that specifically, sort of the pass-through business and how that trended quarter over quarter.

Actually, we saw the greatest increase, as I noted in the call, I ordered them in kind of the impact. We saw our server boards business actually increase within that accessory business, quarter over quarter, more so than any of the other components there that made up that mix.

So memory last quarter was-- memory and hard-disk drives were last quarter, more of that pass-through business we talked about. This quarter we see more demand for our server boards, still some memory there, and chassis, actually.

So was it the-- and this is the last follow-up question here. Was it the lack of additional servers that you were hoping to ship that really impacted gross margin at the end of the day?

Yes, I think that's a fair question. As Charles alluded to, we had some shortages that delayed our delivery of some products at the end. That affected our mix with regard to server solutions we could have shipped at the end.

Okay. So there was some capacity in servers that you were looking to ship at the end of the quarter, but you didn't have the specific components to do it -- and I wish you'd call those components out -- and then-- so to make up the revenue, you sold more of the sub-components?

I'm not sure about making up the revenue, but I do believe that we shipped less of the servers than we could have, had we had more parts.

And would you care to quantify how many additional servers you guys passed up on at this point?

No, I think the percentage is there. You see we were down about 1 point-- 1.4% quarter over quarter as a percentage of our revenues from servers.

Right.

Right. And so if you look at that, last quarter we were down about-- oh, about 2.5% and you saw an impact to our margin. I think this quarter you saw our margin basically flat between quarters, even though we did have a reduction in our server business, right?

Okay, thank you.

And our next question comes from Michael Bertz with Kennedy Capital.

Hi, guys. I guess I'd kind of like to follow on to Alex's train of thought there, and I'm going to ask you to try to quantify, Howard, because, I mean-- I've got the same questions he does about just how this is balancing out. It looks to me like, so if you argue 1.5% or so quarter to quarter down in points, that's about $3 million worth of server business. Is that enough to make up the bulk of the difference?

Obviously, yes, you are flat, essentially, quarter to quarter in terms of gross margin, but we talked-- you guys talked last quarter about that improving some. And so is this the major contributor to that? Or are the server boards, is that business simply that much lower margin than everything else?

Indeed, one of the key reasons is-- was because memory and hard drives both had a big shortage in June quarter and that's why we had to rush suppliers and that's why we paid higher costs for memory and hard drives in June quarter. And that's, I guess, one of the major reasons why our gross margin was not that good.

Okay, Charles, forgive me for sort of following on this a little bit. Hard drives didn't seem to be a problem, unless there was some specific or you can help us understand what specific-- I mean, memory, I believe, maybe a little bit of shortage for specific parts for servers, but hard drives-- the hard drive guys didn't seem to be that big of a deal. And can you-- and I understand having to pay a little bit more for it, but I'm just trying to get some sense, if you can put some numbers around it, for what we're talking about here. I think a lot of us-- that's something we're really trying to understand about your story, with the gross margin.

Indeed, at Super Micro we did suffer some shortages with hard drives last quarter, both hard drives and memory last quarter. It looks like this quarter is improving, but, yes, last quarter we had to pay a little bit higher cost than March quarter or even December quarter.

Okay. Well, just in the interest of sort of everyone's attention to this issue, Howard, let me ask you, as the financial guy, to sort of put some numbers around that. I mean, if you're-- you sort of ranked the impact a little bit, but can you give us BPs of impact, something in terms of how much that might have been for those different components?

Yes, like, for example, let's try it this way. Last quarter we saw about 1.2% decrease in our margins. We had a similar type of decrease in our percentages of server solutions. I'm hearkening back to Q2.

Right, right.

And you saw that about a 1.2% decrease in our margins. And this quarter one of the main factors I cited back in Q3 was basically that the server percentage-- the percentage of our content of our business had decreased, right? This quarter you saw a similar type of server decrease, maybe not as much, but you've seen our margins be flat, right?

So, again, I mean, to help quantify that, we did see increases on our standard gross margin, but they were offset by some of the inventory constraints that Charles has mentioned here and the price variances you've seen.

Okay, so--

So you saw about 100 basis points, like I said, two quarters ago, based upon server mix changing, right?

Okay.

So you basically saw a similar decrease in our server percentage of revenues, but you didn't see that 100 point decrease.

All right. So are you arguing that you saw about 100 and change percent increase in the standard margin, then?

That's fair to say.

Okay. I will get back in queue, but I probably have a couple more later.

Okay.

(Operator Instructions). And we'll go next to Glenn Hanus with Needham & Company.

Okay. Following up on the gross margin question, can you give us the puts and takes on the margin, as you look forward this quarter?

This quarter, indeed, we see memory supply a little bit-- it is much better than last quarter in terms of memory supply. So I believe this quarter we won't have a memory shortage problem any more. Hard drives, we also get a partnership improved, so hard drive demand and supply should be much improved this quarter, as well.

As to other components, it should be greatly improving.

And do you think, perhaps, your server-- you've been a couple of quarters in a row of your complete server systems declining on a percentage basis. Do you think that we can start to see that trend go back in the direction that you've talked about as an overall strategic direction for the Company?

Yes, I do believe our server percentage will start to recover consistently.

And can you just talk about the underpinning factors that's going to move it now, consistently more in that direction?

In June quarter we really suffer a lot for shortages, right? And that's why we spend more (inaudible) with vendors. And it looks it has been dramatically improved. Also, all of our memory supply is improving.

Okay and how is-- is pricing-- competitive pricing versus the major guys been a factor here, one way or the other, this quarter and what you anticipate in the September quarter now?

Pricing, Glenn, has always been tough, all the way around. I mean, the competition is still out there. The same competitors are still out there. We're all going after the same business. We're still approaching it the same way.

Okay. Maybe lastly, with the Nehalem-EX, is-- when should that really get going and do you see that as somewhat of a help for you in the margin?

Since late June we started shipping more Nehalem-EX and this trend will continue. So and also AMD G34. That will help us, as well. The new G34, which just launched two months ago.

Okay, thank you.

Thank you.

And we'll go next to Dinesh Moorjani from Gleacher & Company.

Great. Thank you. Just maybe moving away a little bit from the gross margin side, could you talk about your international ramp is going, specifically where you are in your new customer ramps and you're looking to add another line to your facility in Europe? Also, could you update us on your expansion in Taiwan and if you're seeing any new opportunities in either geography, now that you have a physical presence in these regions?

Yes, indeed, we just invested in Netherlands and Taiwan for logistics and system integration. And however, as you know, in early quarters, right? I mean, in the first few quarters capacity won't be fully occupied. That's why the productivity was not that good yet. However, the situation will be improving.

Today we have a stable OEM and a key systems integrator in Europe and in Asia (inaudible) our local production. So those two are areas we'll continue consistently improving, I believe.

Okay. In terms of the large new OEM that you're ramping, you've talked about the customer potentially getting to a 10% customer, if the rest of your business doesn't grow. What kind of timeframe are you thinking in terms of hitting that milestone?

Howard, can you answer that?

Yes, as we said, Dinesh, it's been over-- we've been looking at the second half of the year is when they'll start ramping. Again, the ramp has been a little slower than we expected, but I think the potential is there for-- as Charles alluded to. And by building those facilities overseas, we have a number of new other customers coming to us to help utilize and fill that. So it'll get better for us as we get going.

Great, thanks.

And from Kennedy Capital, we'll take a follow-up question from Michael Bertz.

Thanks, guys. I'm going to go back to the margin for a second. So, Howard, as you look at the standard margins to go up and maybe that sort of range was fair to think about, I'm guessing it's not going to be consistent across the different parts of the revenue contribution. So can you give me a little bit of flavor, plus or minus? Did it go up more in systems and less in components or how would you think about that?

Yes, I think it's better in the system side for us. It could be better, alluding to the fact that Charles-- we do have -- how do I want to put it? -- capacity that's still not being utilized. So, again, in that area, the margins from that part of the business is still burdened by some overhead that we're not utilizing yet. Okay? But the margins, with the technology transition, have improved in that area.

Okay. And that actually speaks to something else. So if I think about the server side and sort of where I would estimate margins are currently running versus, maybe, where they were running a year ago or even 18 months ago, would you characterize that as still being, like you said, burdened by additional capacity you're not quite absorbing, sort of structurally, but running less than a historical level, and could we see a return to that level?

I think it's fair to say that, yes, we started the facility investment overseas probably about nine months ago now and we've put the investments in and have been ramping that up and, quite frankly, it's not been utilized yet. So we do expect to see higher utilization and, therefore, better productivity, better efficiency out of the facility and, obviously, better margins then.

Okay. I mean, it kind of comes back to sort of the bigger picture question about this. Because you've seen, you might want to say, a sort of a change in sort of the run-rate level as to where margins are more mid-teens than where they had been in the high teens. And I certainly understand gross profit dollars at the end of the day being very important as the business is growing, but it looks like, incrementally, margins haven't been on a positive trend here.

And I think we're all asking these questions because we're all trying to understand how that's going to change. So this will be one way in terms of better utilization of the stuff that you've invested in overseas, particularly for the systems business, if that can come back to a bigger percentage of revenue. But we're all trying to sort of put the pieces together and (inaudible) and say, okay we can see a path to getting back towards maybe those higher teens margins. Can you help us with that a little bit?

Sure. I think one of the things that was a little different for this quarter, again, our inventory went down by about $8 million during the quarter. And, as you know, there are some inventory variances that come through during that period of time that I alluded to in the call. So, again, some of those things offset the positive margins from the standard side and brought it down, back to basically being flat.

Okay. Well, Howard, I guess I'm not really talking about June. I'm talking about looking forward here just sort of the path on what components-- let's say, for purposes of argument, we're running at mid-15%, but your target is to get back to mid-18%. Where are these-- where is each 100 BPs going to come from? Is there going to be 100 BPs from facilities, 100 BPs from standard margin improvement, 100 BPs from greater mix contribution from the systems side? I mean, how do we get there? I guess that's what I'm asking.

There are a few factors that will improve our gross margin and thus our net profit. One is economies of scale, right? We continue to grow our business size and that will kind of help us in terms of price negotiations and product allocation when shortage.

And second is our investment in Netherlands and Taiwan and the new facilities there pretty much under capacity-- capacity under usage. So that will continue to improve, for sure.

And number three the headcount kind of increase. Last 12 months we increased 20% headcount compared with our competitors. They pretty much keep flat, right? So that kind of over-increase kind of a big portion of our costs. And looking forward, we already have a very strong team here, so in the coming year (inaudible) we pretty much won't hire a high percentage of headcount again.

Okay. Thanks, guys.

And we'll take another follow-up question from Alex Kurtz with Merriman & Company.

Thanks. I'll take a breather on gross margin and mix it up for a second, Howard. What was Europe, quarter over quarter, for you guys?

Europe -- the revenues from Europe actually were up for us on a percentage basis. They were 21.4% in Q3 and 21.7% in Q4.

Okay. So from a geo perspective, do you guys see any great variances across your major markets?

No, I think as we talked about when we were on the road earlier, people would ask whether we were seeing a lot of effect from the Europe stuff and the countries that we're operating in are not in those Mediterranean areas as much, so we didn't see as much effect exhibited by these numbers.

Okay and just to clarify-- back to gross margin, just to clarify on some of Michael's questions, if you think about the Westmere adoption that you saw in the quarter, were there any delays in inventory from Intel around their product to help push out more servers in the quarter?

From Intel product (inaudible) we didn't see any shortage issues, but memory, hard drives we see improving and AMD G34 that, for sure, will help us on there.

Okay. So those were the major components. So I think, Howard, in the past what we've always talked about has been new processors lead to better margins, right?

Right.

That's sort of been the story line. So just as a follow up, did you see the server margin-- I guess, can you quantify, again, what the server margin sort of grew sequentially, so we can, at least, understand that there were some improvements in that fundamental piece of your business?

I think, as I talked-- mentioned earlier, it was 100 BPs improvement in our standard margins, across the board.

Okay.

And so, again, those were offset by some of the inventory variances I talked about. Now I had an inventory that went down for the quarter, which is a little bit unusual for us in a growth type of ramp, so, again, expectations are that we will be growing our revenues-- growing our revenues and growing our inventory to support that growth.

And just the last question. I know that increasing your capacity in Europe has always been a big cornerstone for you guys. When you talk to investors about structurally improving your long-term gross margin, I think even this upcoming fiscal year I think there was an expectation that that was going to help. Is that because of the transportation cost, right, that you were going to see gains from?

Yes.

Where are we on that? Is that sort of off the table at this point?

Yes. Alex, as we mentioned, we're not as far along as we thought we would be in that process. I think it's from a-- basically working with our customers, getting to know that business and then growing that business. We have-- as I said earlier, we have high expectations for that business, still, going forward.

So you do not expect to sort of reap those benefits, then, from the increased capacity in Europe?

I do. It's just going to be ramping.

Okay.

It's just behind with the schedule of the customer.

Okay. All right. Thank you.

And we'll go next to [John Lopez] with [Saratoga Capital].

Hi, thanks. I was just curious on the guidance. You guys characterized the industry as being sort of flat sequentially, I think, is fair. But just-- we don't have a long time series with you guys, but you've been down once, sequentially, which is 2008. So-- and, obviously, last year there was nothing even remotely seasonal about your quarter. So I'm just curious what makes this quarter feel more seasonal? Can you just discuss why seasonality is more of a factor for you now, perhaps, than it's been in your recent past?

I think it's a combination of worldwide market, IT industry kind of trend and our own historical experience. So this September quarter looks like the shortage problem will improve and new products will be mostly ramped up. However, kind of from our history September usually does not grow that much.

Yes, it hasn't grown as much. And, again, Europe is off, basically, for the holidays, I guess, in the first month. So, again, that usually is indicative of how we've guided before. And just to bring back on the guidance, again, we're at $200 million to $210 million. While that's only down maybe 1% at the low end, we're up 4% on the high end. So--

Okay. Very helpful. Thanks.

(Operator Instructions). And we'll take a follow up from Glenn Hanus with Needham & Company.

Could you comment on your long-- you've commented in the past of getting back to 30% revenue growth. How are you feeling about that target and what sort of timeframe should we think about for that?

Last year we achieved 43%. So last year--

Yes. But, I mean, that was an easy compare. So--?

So, I mean, looking forward I hope we can catch up. That's (inaudible) 30% year-to-year range. That's a goal we are looking for.

Yes, Glenn, I think if you take the soft compare off for '09, even if you go back and through out '09 and put '08 in there, we did $540 million. We're still up plus 30%-plus. So we've got seven years of CAGR at 30%-plus, excluding '09.

How about on the operating expense side? Could you help me out a little bit with the puts and takes there, the R&D was up quite a bit this quarter. Should we think about that as coming down, perhaps, here in September? And then the sales and marketing, actually, was down this quarter sequentially, despite revenue being up, and how should we think about that in September?

Yes. For R&D, I just mentioned in last year we increased about 10% headcount R&D. So we already increase a lot of people and the major reason we increased so much last year because we supported some key accounts. We kind of enabled a strong product line for them, but today it looks (inaudible) has been very strong. So looking forward, we won't hire that high percentage of R&D headcount again. So we'll still hire some, but it won't be as aggressive as last year.

And then on the sales and marketing?

Sales and marketing we will continue to grow kind of (inaudible) level.

And why was it down this quarter, sequentially?

This quarter?

We were down a couple hundred thousand this quarter, primarily because of trade shows last quarter, Glenn.

Sure. Okay. All right. Thank you.

And this does conclude the question-and-answer session of our conference call. I would like to turn the conference back over to Mr. Liang for any 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. Ladies and gentlemen, that does conclude the Super Micro Fourth Quarter Fiscal Year 2010 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.