超微電腦 (SMCI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated First Quarter Fiscal 2011 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.micrysystems.com in the Investor Relations sections under the Events and Presentation tab.

During the Company's presentation all participants will be in a listen only mode. Afterwards, security analysts and institutional portfolio managers will be invited to participate in a question and answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded, Tuesday, October 26th, 2010. A replay of the call will be accessible until midnight November 9th by dialing 1-877-870-5176 and entering conference ID number 1980946. 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 and financial results for the first quarter fiscal year 2011, which ended September 30th, 2010.

Before we begin I'd like to advise you of up coming investor conferences in which Super Micro will be participating. On November 11th we will attend the Southwest Ideas Conference in Dallas and on November 16th we will attend the Merriman Investor's summit 2010 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 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 2010 and our other SEC filings. All of those documents are available from the investor relations page at 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 three of this presentation or to our press release published earlier today. In addition a reconciliation of GAAP to non-GAAP 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 our first quarter. We are pleased that our first quarter revenue was $207 million or 2.7% higher quarter-over-quarter and 39.5% higher year-over-year. This result is another record high for Super Micro.

Non-GAAP net income was $9.3 million or 2.1% higher quarter-over-quarter and 59% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.22 per diluted share compared to $0.21 last quarter or $0.15 last year. Slide five please.

Now, I would like to share with you some key points regarding our operating performance in the first quarter. The first quarter of fiscal year 2011 represents our sixth straight quarter of increasing revenues and our fifth straight quarter of record high revenues. We continue to grow because of our strong products that have been optimized to newer CPU and other technologies. They were launched during the last year and our products over industry-leading best performance, best performance per watt and performance per dollars, performance per square foot and the lowest total cost of ownership.

The Super Micro very proposition continues to win customers. We are pleased with this quarter's performance in spite of some seasonality effects on the industry. We finished September with good momentum in the last weeks, which indicated that we should see a seasonally strong end to the calendar year.

From a geography perspective, our revenue in the U.S. was consistent but our revenue both in Europe and in Asia grew strongly during the quarter. Demand for Super Micro products continues to grow in these regions, particularly in Asia, where we continue engage new customers with premier position in data centers, cloud computing and other vertical enterprise. This strong Asia demand includes China, Japan, India and others and we are focused on winning more key relationships there.

Another key highlight of our global success was the increase in position of our European and Asia system operations. Better utilization contributed to our better profit margin in the quarter, as we have increased the number of models and production capacity. Although the overall utilization is still low due to the fact that they are new facilities, we are pleased with the progress we are making.

On the system side, we shipped more systems this quarter, which contributed to 36% of our total revenue. We have a strong system product line, particularly in the system based on our Twin architecture. We had a very strong quarter in shipment of our Twin family of systems, which included the Twin dock man and our Twin ray offerings. Many of the systems were shipped. Many systems we shipped were higher performance configurations. That led to higher average selling price, which helped us to achieve stronger margin for the quarter. In fact, our operating performance for the quarter improved over recent quarters and we think we are headed in the right direction to improve profitability.

As we have stated in the past, Super Micro is a fast growing Company. Our strategy is to grow our business by continuing to take time to market advantage share in the co-IT infrastructure market.

Through our technology innovation we are also establishing our position in other markets such as embedded in the [tier] PC work station, switching and storage. We will achieve that growth by continuing to be first to market with the broadest array of building blocks that leverage the newest technology.

We will also continue to invest and aggressively pursue opportunity in new markets by optimizing our product lines for them. In order to pursue growth, we are investing in the following three areas; first, we continue to grow in R&D and maintain our strong technological leadership in innovation.

Second, we invest in our people, particularly in sales, FAE and marketing to target vertical markets and to promote Super Micro in specific geographies. Third, we continued to build the capacity for system integration, technical service and logistical support in all regions and in particular Asia. As a growing Company, with our track record, we see enormous market opportunity that can be better served by our products.

Slide six and seven please. Along with some leading developments our leading technologies include first, our newly optimize Twin server architecture, a closed 1U and 2U blade forms, continue our leadership and momentum for new generation products, such as 2U Twin Q. Our award-winning TwinBlade is now in high volume production featuring 20 DP nodes in the 7U blade enclosure with 40G Infiniband or our new 10G Ethernet connectivity as options. Additionally our Twin architecture based GPU blade is coming soon.

Our GPU optimizer product now in 1U, 2U and 4U blade forms that provide extreme performance in calculation intensive applications; we will further optimize the computing density by offering 4 GPU in one-use solutions soon.

Atom server nine featured in low power, low noise and some more form factor optimized for embedded in server application, server appliance application. Also, our 8-way system will be a target at high end enterprise mission critical applications with the need of huge memory, capacity and tremendous computing power.

Our double sided storage that double the hard drive density with the ability to hot-plug from the front and the backside. Our cabling and air flow optimize super rack is ideal for high density and complicated cabling recommend configuration. Also, powerful for the 10 gig switch for [tray] and standalone posts are in production now and FCoE, fiber channel over Ethernet switch solution is coming soon. We look forward to promoting this product line in the coming quarter and beyond. For more specifics on the first quarter let me turn it over to Howard now.

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 and provisions for litigation expense.

Reconciliation of GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release and in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with a review of the first quarter's income statement. Please turn to slide 8.

Revenue was $207.2 million, up 39.5% from the same quarter a year ago and up 2.7% sequentially. The increase in revenues from last year was fairly widespread among our customer base, which we believe was primarily due to a continuing improvement in a global economy and the server refresh cycle. This sequential increase in revenues during a seasonally weak quarter for the industry was primarily due to the continued emphasis being put on obtaining effective and efficient solutions, such as our 2U Twin and Twin Square servers and storage solutions as the server refresh cycle continues.

Slide nine. Turing to product mix, the proportion of revenues from server systems was 35.7%, which was an increase from 34.5% a year ago and 32.2% last quarter. ASPs for servers was about $1,500 per unit, which is up from $1,400 per unit last year and last quarter.

The increase in absolute dollars of server products from a year ago was primarily due to increase in shipments of Twin and GPU servers. The increase in absolute dollars of server products sequentially was primarily due to the increase in shipments of Twin and Twin Squared servers and storage servers. We shipped approximately 50,000 servers and 950,000 subsystems and accessories in the first quarter.

We continue to maintain our diverse revenue base with none of our over 400 customers making up more than 10% of our net sales in the first quarter. Furthermore, 58.7% of our revenues came from the U.S. and 60.2% from our distributors and retailers.

Internet data center revenue was 7.6%, which was an increase from the prior quarter of 6.9%.

Asia and Europe revenues grew faster than the U.S. As we continue to expand our operations overseas, we expect to grow our percentage of overseas revenues due to the better service we can provide locally to our customers, as well as by reducing the logistical expenses to us and to our customers, such as freight charges.

Slide 10 and 11; non-GAAP gross profit was $33.2 million, up 34.8% from $24.7 million in the same quarter last year and up 6.9% from $31.1 million sequentially. On a percentage basis gross margin was 16%, down from 16.6% a year ago and up from 15.4% sequentially.

Price changes from Ablecom resulted in a positive 0.1 basis point change to the gross profit in the quarter with total purchases representing approximately 20.9% of total cost of goods sold compared to 22% a year ago and 14.7% sequentially. The year-over-year decrease in gross margins resulted from the increasing cost associated with our overseas expansion and an increase in shipping costs associated with higher peak season rates.

The sequential increase in gross margin primarily resulted from a higher percentage of sales complete service solution, as noted earlier, offset in part by higher shipping costs during the period. As we bring up our overseas facilities, we should see reductions in our expenses and the time to deliver products to our customers.

Slide 12; operating expenses were $18.7 million, up from $15.6 million in the same quarter a year ago and from $18 million sequentially. As a percentage of revenue, operating expenses was 9%, down from 10.5% year-over-year and up from 8.9% sequentially. Operating expenses was higher on an absolute dollar basis year-over-year, primarily due to additional headcount, primarily in R&D and production, as the Company continues its investment into its product portfolio as well as its expansion overseas.

Sequentially we saw an increase, primarily in sales and marketing expense, due to an increase in marketing and development funds to promote new products and from headcount additions to prepare the Company for additional growth. Headcount increased by 44 sequentially to 1,080 total employees.

Operating profit was $14.6 million or 7% of revenues, up from $9.1 million, or 6.1% a year ago and up from $13.1 million, or 6.5% sequentially. The improvement in our operating margins from last quarter and last year has been done while growing our revenue base, expanding our product lines and increasing our geographical capabilities. We do expect to continue to make these investments and continue our progress toward the long-term success of the Company.

Net income was $9.3 million, or 4.5% of revenues, up from $5.8 million or 3.9% of revenues a year ago and up from $9.1 million, or 4.5% of revenues sequentially.

Our non-GAAP fully diluted EPS was $0.22 per share, up $0.07 from $0.15 per share a year ago and up from $0.21 per share sequentially. The number of fully diluted shares used in the first quarter was 42,716,000. The increase in diluted shares from last year was primarily due to the impact of options, which were previously under water.

The tax rate in the first quarter on a non-GAAP basis was 35.8% compared to 35.1% a year ago and 30.2% sequentially. The R&D credit expired on January 1st, 2010. Should the credit be reinstated retroactively, then the Company would adjust in the quarter the credit is reinstated. We do expect the effective tax rate on a non-GAAP basis to be approximately 35% for the December quarter.

Turning to the balance sheet on a sequential basis, slide 13, cash and cash equivalents and short- and long-term investments were $89.4 million, which is up from $79.4 million in the prior quarter. In the first quarter free cash flow was a positive $9.7 million and the net change in cash was a positive $10.9 million. The cash balance reflects the land purchase of approximately $6.1 million during the quarter. Excluding this land purchase the Company cash and cash equivalent short- and long-term investments would have been $95.5 million.

Slide 14; accounts receivable decreased by $1.2 million to $71.8 million and DSOs was 32 days, an increase of one day from the prior quarter.

Inventories increased by $15.9 million to $151.5 million with days in inventories increasing by one day to 76 days. The increase in inventory was due in part to preparing for a seasonally strong December quarter, as well as to support the growth of our overseas operations.

Accounts payable increased by $17.7 million to $113.1 million but the days payable outstanding increasing by one day to 55 day primarily due to the increase in inventory. Overall, cash conversion cycles were 53 days, an increase on one day or 52 days in the prior quarter.

Now for a few comments on our outlook; as indicated previously, during the first quarter we saw continued growth in our business, especially in Asia and Europe and the ramping of sales from our technology introductions, such as Twin storage and GPU. We expect to see continued ramping of these products, as well as the ramping of our facilities in the Netherlands and Taiwan. Both these factors should continue to improve our profitability.

In addition, December is seasonally a strong quarter for the industry. Therefore, the Company currently expects net sales for the quarter ending December 31st, 2010 in a range of $220 million to $230 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.23 to $0.27 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. We believe that the second quarter is shaping up to be a strong quarter of growth. We are well positioned with our innovative product strategy to pursue this growing market opportunity. We are also well positioned with our regional system integration operation to booster our presence in different geographies. We will stay focused on our strategy of growth balanced with investment and profitability.

Operator, at this time we are ready for questions.

(Operator Instructions). Finally, we ask that you limit yourself to one question and one follow-up until all in the queue have had an opportunity to ask a question. We will then come back to you for additional questions. (Operator Instructions). And we'll go first to [Noah Hootz] with Bank Equity.

Thank you for taking my questions and speaking on behalf of [Rajesh Guy] today my question relates to gross margins. Last quarter you had margins of about 15.5% and you stated in there that there were some component shortages, which led to system sales coming in below your expectations and you said that had a negative effect of about 100 basis points on your gross margin. Now, system sales have returned to much higher levels and we've only seen about a 50 basis point increase in gross margin. Is there anything else that's been affecting that because I noticed in Q2 of 2009 with a similar product breakout you reached 16.7% in gross margins?

Yes thank you for the question. Indeed last quarter, I mean the September quarter, we continued having some component shortage, although the shortage overall has been improved. On memory side -- I mean the team, memory team, indeed the price dropped a lot, so indeed there we suffered a little bit for the drop in price for memory and that's why although overall business has been growing last quarter but still we grew only 50 points. But looking forward, the coming quarter situation should be better.

Okay well, I guess, what I am saying is that we've seen a significant increase here in your system sales but there hasn't been that sort of corresponding increase in gross margins.

Yes exactly why I say in September quarter we experienced the memory team price drop a lot and we have some inventory. That's why we suffered it there.

Okay and then also relating to the system sales, how much of the demand in the September quarter, how much of that was sort of overflow from the previous quarter and how much of that is new demand?

Yes a portion of it was some overflow from previous, as Charles mentioned. We did have some component shortages. That did help a little bit but, again, as you mentioned it has improved for us this quarter with regards to the shortages of short components so, again, it wasn't a huge dollar amount. Let's put it that way.

Okay thank you.

Alex Kurtz, Merriman Capital.

This is Amelia in for Alex today. Just going back to the component availability, do you see any changes that were notable on availability this quarter? And also, was it consistent throughout the quarter or did you see a ramp at the end, any color you can give us around that would be great?

Okay, Amelia, overall component shortage has been improving, especially in memory now, a little bit of a surprise. So, as you may know, the main memory price dropped a lot, I'd rather say maybe more than 20% in that two months, so other than [ANT] there's some [TP&O] components we still experience some shortage, although that situation has been improving. And it's likely that situation will be much better condition after December or January I believe.

And just moving on quickly to your more geographic outlook, you obviously had broad based strength in both Asia and Europe. Were there any verticals that were extremely strong or did you see any that out performed others generally either in EMEA, Asia or in the U.S.?

Yes I mean we see our 2U Twin Squared, especially with GPU. That product on line has been growing very well and that's specifically for kind of oil and gas and kind of some scientific calculation, some [measure] simulations and storage. Storage is another area we saw very good growth in last quarter.

All right thank you so much. I appreciate it.

(Operator Instructions). Glenn Hanus, Needham.

Nice report. Let's just go back to the gross margin for a minute so, as we look sequentially here and even beyond here and into the March quarter, could you give us a sense of just which factors kind of come into play most and if you can give us some, any kind of sense of how much gross margin improvement we should look for?

I guess our production facility in Europe and Asia will be continual improvement and we are growing the capacity on both sides so that will continue to improve for next quarters I believe and as to the impact, Howard, do you have a more solid number?

Yes, Glenn, we had some investments in our overseas operation, as you know. If you take a look at last year probably a lot of the decrease in our gross margins comparably speaking to last year point toward investments that we're making in the B.V. and Asia facilities. I think you'll see probably about a 0.4%, 0.5% change.

Okay so this quarter gross margins you'll get some, if maybe you could rank the different factors that should improve your gross margins this quarter. The European and Asian factor, is that most significant? And then there's the server mix and parts issues. Can you kind of go through the factors that should improve margins this quarter and sort of maybe rank them and what's most impactful?

Yes I think you'll see that and Charles mentioned some componentry, the shortages with regard to componentry, things improving. That's obviously high on the list. Utilizing our production capabilities overseas, that I mentioned, has two benefits for us. Not only do we get to generate revenues from the investments we've already made there but also, as I mentioned, our shipping expenses were fairly high this quarter due to some peak seasonal rates so we do see that hopefully improving for us this quarter and going beyond. I think if I was going to rank those would be the three I would rank on the plus side.

Okay and then are there some offsetting factors that come into play this quarter on the minus side?

Yes I think that if you take a look at it you can flip around some of the overseas expansion that we're doing. If the revenue or capacity isn't taken up as we expect that could be potentially neutral as compared to this quarter or potentially less of a gain. Let's put it that way.

But as of this moment those are the areas will be quite positive.

Yes.

For both European and Asia.

Okay thanks I'll stick to the one question.

(Operator Instructions). And we'll take a follow-up from Noah Hootz.

Yes I just had one quick follow-up on clarifying a few things. You mentioned that some of the factors affecting your margins were shipping costs and memory prices. Are these component and shipping charges not passed directly to customers as they change when they go up and down?

Yes freight end is not -- again, there are some things that we can pass on a portion of it. We found that in the September quarter there was a peak season and some additional charges, seasonally was higher than normal, so we aren't able to pass it all 100%.

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

Thank you for joining us today and we 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 first quarter fiscal year 2011 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.