超微電腦 (SMCI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Super Micro Computer, Inc. Second 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 has been made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the events and presentations tab.

During the Company's presentation all participants will be in a listen-only mode. Afterward securities analysts and institutional portfolio managers will be invited to participate in a question and answer session but the entire call is open to all participants on a listen-only basis. As a reminder, this call is being recorded Tuesday, January 25th, 2011. A replay of the call will be accessible until midnight February 8th by dialing 877-870-5176 and entering conference ID number 2548129. 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'd like to turn 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 second quarter fiscal year 2011, which ended December 31st, 2010.

Before we begin I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On February 9th we will attend the Stifel Nicolaus Technology Conference in San Francisco, 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 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 also available from the Investor Relations page of Super Micro's website at www.supermicro.com. We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide 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 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 second quarter. We are pleased that our second quarter revenue was a record high, $241 million or 16.2% higher quarter-over-quarter and 32.3% higher year-over-year.

Non-GAAP income was also record high of $13.3 million or 43.9% higher quarter-over-quarter and 44.4% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.31 per diluted share compared to $0.22 last quarter and $0.22 last year.

Slide five please. Now I would like to share with you some key points regarding our operating performance in the second quarter. The second quarter of fiscal year 2011 represents our fifth straight quarter of record high revenues. As a faster growing Company, we have been focusing on increasing revenue and gaining market share. As a result, we are achieving a better economic scale and brand name recognition. After economical (inaudible) for almost two years now we have been consistently growing faster than our competitors and the general market. With $241 million in sales this quarter our run rate will soon surpass $1 billion making another milestone for Super Micro.

For the past several quarters, we have been laying the foundation for our growth by adding our engineering and production capacities. Geographically we expanded our capacity for logistics and system integration in Europe and Asia. So we are able to further improve our time to market advantage and lower our shipping and overall costs for our customers in those regions.

Our results over this quarter indicated that our plans for strengthening our foundation are paying off. Indeed we are doing so by further [choosing] of our Taiwan R&D system integrations and operations capacity. In fact, Super Micro grew in all regions last quarter much faster than our competition. Especially we have been experiencing strong growth in APAC and Europe. Another aspect of building our foundations is through our branding. The Super Micro brand again great reputation from our consistent focus on providing application optimized solutions based on the latest technology and in green.

Super Micro's unique approach offers customers the greatest choice and flexibility in optimizing the solution that comes the closest to meeting their requirements. Super Micro's optimized solutions and time to market leadership yield better ROIs for customers because of efficiency in performance, power consumption and physical space. These are the reasons that the Super Micro brand is recognized by customers in many different segments like server appliance, enterprise computing, Internet data centers, cloud computing and HPC solutions such as oil and gas, financial, medical, life science and so on.

During last quarter we saw evidence of this growing brand awareness with strong growth in our high-end (inaudible) server product lines. We sold a record number of server solutions including complete integrated server. Our OEM and direct customers see the value and quality of Super Micro integration and testing. Thus our systems sale has increased to over 40% of our total revenue. By selling more completed solutions, we are increasing our revenue and net profit.

Super Micro's Blade product line continues to grow and our growth trend has begun accelerating in the past several quarters. Our award winning TwinBlade product has especially achieved strong brand recognition. Indeed, last quarter our SuperBlade revenue was more than doubled over the previous quarter, which makes Blade our faster growing product line. Recently at our super computing show, SC '10 we launched our new GPU Blade to turn our SuperBlade product line. This new introduction will further strengthen not only our Blade but also our GPU computing product offerings.

Our GPU solutions have also been very strong this quarter. GPU has been one of our fastest growing product lines in the last eighteen months and Super Micro continues to lead the market for GPU solutions. Most recently our GPU installation at the University of Frankfurt, Germany has been ranked by 20 seconds fastest computer on top five entries and also achieved a ranking of number eight as the most power efficient super computer on green (inaudible).

The GPU computing market is one of the strongest growth markets in the x86 market and Super Micro evidence study is in the medium position. While focusing on our revenue growth and gaining market shares, we have also improved our profitability for the third straight quarter. We have demonstrated that we can grow both top line and bottom line to remain our focus on this balanced growth. However, we will provide more financial commentary data.

Looking ahead to upcoming technology trends, we are excited about our upcoming Intel for (inaudible) and (inaudible) solutions. This is a very significant design change for from Intel that will bring much better performance to the system solution. The EP SandyBridge solution will be launched in February and the DP SandyBridge (inaudible) solutions will be launched later this year.

Super Micro has been busy developing our new X9 generation server boats and chasse designs for optimizing the new processor technology. It is our goal to utilize our (inaudible) approach to develop the best array, the largest array of server products that will available at a time of launch. This will provide us a great deal of advantage of gaining market share.

Let me now share with you something about how our product line geared up for upcoming quarter. Slide six and seven please. Along with some new developments our leading technology include first; our new expanded SKUs Twin architecture for 1U and 2U platform continues our leadership momentum. The 2U twin cubes we have set another highlight in computation density.

Our award winning TwinBlade is in high volume fashion featuring 20BP nodes in a 7U blade enclosure with duo 40 gigabit per second InfiniBand or 10G Ethernet connectivity as options.

Our GPU optimizer product line in 1U, 2U, 4U and blade platform provide extreme performance in calculation intense applications and have been the most popular GPU servers in the market. Our embedded server 9 featuring low power, low noise and some (inaudible) optimizer for special server appliance applications.

Our innovative double-sided storage provide a high density fortifying 3.5 inch hard drive or APA 2.5 inch hard drive in 4U with the ability of high power from front and back sides. Our 8-way system is targeted at high-end enterprise mission critical applications with the needs of huge memory capacity and tremendous computing power.

The Super SBB storage bridge bay, which uses our twin design concept, can incorporate or bridge [data] fast and have enough storage for mission critical storage solution. Our SuperRack simplified the cable management and maximizes airflow for complicated [rack-man] compilations. It also allows easy component access from front and back, extremely optimize for our twin and double side architecture.

And our 10G switch for blade and standalone products are in leading position in performance and cost as we enter the 10G Ethernet era. And our MicroCloud is an optimized solution for web hosting and cloud applications in an extremely low power consumption and high density computation.

In summary, we have laid a strong foundation in our global operations and in our engineering capability. Our engineering foundation has provided Super Micro with the strongest product lines in our history and mostly innovative products in the industry. We look forward to promoting these product lines in the coming quarter and beyond. For more specifics on second quarter let me turn it over to Howard.

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

Let me begin with a review of the second quarter income statement. Please turn to slide eight. Revenue was a record $240.8 million, up 32.3% from the same quarter a year ago and up 16.2% sequentially. An increase in revenues from last year was fairly widespread among our customers and our product base, which we believe was primarily due to the server refresh cycle and the continuing ramp of our optimized products.

The sequential increase in revenue was primarily due to continued emphasis being put on obtaining efficient and effective solutions and spread across our optimized product lines. On a percentage basis, blades and GPUs were the highest growth, both sequentially and from last year.

Slide nine. Trade to product mix. A portion of revenues from server systems was 40.5%, which was an increase from 36% a year ago and 35.7% last quarter and fees per servers was about $1,600 per unit, which is up from about $1,400 and $1,500 per unit last year and last quarter respectively.

The increase in absolute dollars of server products from a year ago was primarily due to the increase in shipments across our server product line. The increase in absolute dollars of server products sequentially was primarily due to a widespread increase in shipments of servers primarily toward our OEM and end customers. We shipped approximately 61,000 servers and 957,000 subsystems and accessories in the second quarter.

We continue to maintain a diverse revenue base with none of our over 500 customers making up more than 10% of our net sales in the second quarter. Furthermore, 57.3% of our revenues came from the U.S. and 53.7% from our distributers and resellers.

Internet data center revenue was 9.4%, which was an increase from a prior quarter of 7.6%. Asia and Europe revenues continue to grow faster than the U.S. We continue to expand our operations overseas and we're breaking ground on our Taiwan facility shortly.

Slide 10 and 11. Non-GAAP gross profit was $40.4 million, up 32.4% from $30.5 million in the same quarter last year and up 21.3% from $33.2 million sequentially. On a percentage basis gross margin was 16.8%, up from 16.7% a year ago and up from 16% sequentially.

Price changes from AbleCom resulted in a positive 12 basis points change to gross profit in the quarter and total purchases represented approximately 23.1% of total cost-of-goods sold compared to 26.5% a year ago and 20.9% sequentially. The increase in gross margin primarily resulted from a higher percentage of sales of complete server solutions, as noted earlier, as well as better costs of our components offset in part by higher inventory reserves during the period.

Slide 12. Operating expenses were $21.6 million up from $16.4 million in the same quarter a year ago and from $18.7 million sequentially. As a percentage of revenue operating expenses was 9%, which is the same as a year ago and sequentially. Operating expenses was higher on an absolute dollar basis year-over-year primarily due to additional head count in R&D production as the Company continued to invest to its product portfolio as well as expand its operations both domestically and overseas.

Sequentially we saw an increase primarily in R&D personnel expenses related to an increase in headcount and bonuses as well as materials used in the launch of new products, as mentioned previously, to prepare the Company for additional growth. Headcount increased by 56 sequentially to 1,136 total employees. The increase was primarily in production and R&D.

Operating profit was $18.8 million or 7.8% of revenues, up from $14.1 million, or 7.7% of revenues a year ago, and up from $14.6 million, or 7% of revenues sequentially. The improvement in our operating margin from last quarter and last year has been done while growing our revenues base, expanding our product lines and increasing our geographical capabilities. We do expect to make these investments and continue our progress toward the long-term profitability and success of the Company.

Net income was a record $13.3 million, or 5.5% of revenue, up from $9.2 million, or 5.1% of revenue a year ago, and up from $9.3 million, or 4.5% of revenues sequentially.

Our non-GAAP fully diluted EPS was $0.31 per share, up $0.09 from $0.22 a share a year ago and sequentially.

The number of fully diluted shares used in the second quarter was 42,691,000. 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 second quarter on a non-GAAP basis was 28.3% compared to 34.1% a year ago and 35.8% sequentially. The R&D tax credit, which expired in January 1st, 2010, was reinstated retroactively during the second quarter. This resulted in an additional $0.02 to the non-GAAP fully diluted EPS for the catch up in tax credits from prior periods. Without this catch up our non-GAAP fully diluted EPS would have been $0.29 per share on a tax rate of 34%. We expect the effective tax rate on a non-GAAP basis to be approximately 33.5% for the March quarter.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and short- and long-term investments were $92.7 million, which is up from $89.4 million in the prior quarter. In the second quarter free cash flow was a positive $3 million and the net change in cash was a positive $3.7 million.

Slide 14; accounts receivable increased by $6 million to $77.8 million and DSOs was 29 days, a decrease of three days from the prior quarter.

Inventories increased by $36.1 million to $187.6 million with the days in inventory increasing by two days to 78 days. The increase in inventory was due in part to prepare for a continued growth in our business and the effect of the Lunar New Year on shipments from Asia. In the future we do anticipate some increase in inventory, as we continue to ramp our overseas facilities.

Accounts payable increased by $30.9 million to $144 million with the days payables outstanding increasing by four days to 59 days, primarily due to the increase in inventory.

Overall cash conversion cycle days were 48 days, a decrease of five days from 53 days in the prior quarter.

Now for a few comments on our outlook; as indicated previously, during the second quarter we saw continued growth in our business, especially in Asia and Europe, and the ramping of sales across our product lines. We expect to see continued ramping of these and other products as well as ramping of our facilities, especially in Taiwan. For the Taiwan facility we expect to incur about $15 million to $20 million of additional capital expenditures through the calendar year end.

In addition, we are preparing for new technology launches, such as SandyBridge from Intel. However, March has historically been a seasonally weak quarter for the industry. Therefore, the Company currently expects net sales for the quarter ending March 31st, 2011 in a range of $235 million to $245 million. Assuming the revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.25 to $0.29 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. Super Micro does finish a very strong quarter with another record high. As we look forward to 2011 we are confident that our strong and improving foundation will continue our momentum for growth. We have planned ahead for our important technology change that will occur this year and we are again focused to be the best in performance and to be the first to market.

In 2011 we will continue to expand our global system integration facilities and service center to grow in various markets. As always, we plan for great growth and profitability and we will do so by staying balanced and focused on our strategy.

At this moment 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).

We'll go first to Rajesh Ghai with ThinkEquity.

Hi. This is Noah, who is speaking on behalf of Rajesh Ghai. I have a question for Howard. Last quarter you mentioned that there's a number of positive factors that were going to be helping drive the gross margins higher and I think those were lower component costs, lower freight costs with the new European facility and new multi core processors, which were going to carry higher margins, so it seems like at least two of those have already materialized this quarter and I was just wondering if you could provide some color as to how each of those will affect gross margins going forward and what kind of additional expansion we can see from them.

This is Howard and again, yes I mentioned those last quarter. Again, we saw some positive benefits that I've mentioned with regards to component pricing for us as we continue to execute our strategy of growing our scale. I think, as I mentioned, we are expanding overseas as Charles mentioned. We're continuing to invest overseas. There will still be some time with that but we are at the beginning stage of this. We do expect in the future to have positive effects on our expenses going forward with that.

Aaron Rakers, Stifel Nicolaus & Company, Inc.

Yes thanks. Congratulations on the quarter, guys. When I look at the mix of your business obviously it looks like you hit a fairly high mark here relative to the last several quarters. Between systems and subsystems how are you guys thinking about the mix going into the March quarter and then even beyond that? Are we at a new level that we're kind of building off of to work towards that 50% contribution or could you see us go back into that mid 35%, mid 30% contribution over the coming quarters again?

Hi, Aaron, this is Howard. I think we've always say that long-term we we're going to try to get to about a 50/50 balance in the last couple of years and we're executing toward that. I think that's the way to put it.

And can you just, on a follow-up, can you talk a little bit about linearity in the quarter? I know that there has been -- I think VMware was out earlier this week talking about flattish server shipment assumption for the x86 server market. What have you seen from a demand perspective linearity in this last quarter overall?

Yes historically this Company has been very linear within its quarters, as I've mentioned before and this past quarter we didn't see any difference with regard to that. It's been fairly linear.

Okay I'll get back in queue.

Alex Kurtz, Merriman & Company.

Yes thanks, guys, nice execution on the gross margin. So, Howard, given the higher margins that are associated with the servers, just a follow-up to the previous question, I mean are you assuming in your guidance servers being at least flat from a unit shipment perspective or do you think there are some shifts in ASP that we should consider in our models for the March quarter?

Well, I think one thing that you should take a look at, again, I mentioned that the Internet data center revenues were up and, as we've talked before, that's a little bit project based, so again that could be in and out and that contributes primarily to server solutions.

Okay so it sounds like the Internet data center space was sort of -- I don't want to call it one-time factor but you saw a nice lump sum of sort of project coming out of that sector and you wouldn't expect that in the March quarter.

I wouldn't say we wouldn't expect it. It's just something that comes as it comes I guess.

All right thanks, guys.

Glenn Hanus, Needham & Company.

Howard, maybe we could focus on operating expenses, pretty healthy growth, especially in R&D sequentially this quarter. Could you comment on your plans with some of that this quarter? With some of that sort of one-time in nature and not all really headcount related and might we see sort of a flattening of OpEx now for the next couple quarters?

I guess our growth will be continued to be very consistent expect for in the last two years we had spent a lot of effort to expand our integration in capacity in Europe and R&D and integration in Taipei so those the investment has been ready for production and that's why you see our economic scale has been growing, not just headquarters but in Taiwan and in Europe. So this trend will continue so talking about investment in R&D headcount I believe we will be like before. We will continue to grow but our economics of scale have been growing, improving I mean.

Oh okay thank you.

Nehal Chokshi, Technology Insights Research.

So you commented on your strong systems, your growth as part of it with the OEM customer ramping quite well, do you have any sense of -- can you share with us rather where you think you are in terms of innings with the ramp of your various OEM customer relationships?

Indeed our growth has been very good in both areas. One is our OEM and the other one is direct accounts. I would like to say both segments are about equally good though. And because we have a high mix of product line and also high mix of customer, so I believe our growth in direct accounts for OEM and end use will continue to growth with good balance.

Okay and I also have an additional question, more with the -- I guess the channel based revenue. Do you have a sense as to what is the average age of your customer servers, especially with respect to what is believed to be I guess around 3.5 years industry wide?

Nehal, this is Howard. Like I said, I've seen a range of just laughingly some of our customers have servers up out there for quite a bit of time but really the technology is changing quite rapidly and so we're finding that the benefits that we're providing from an efficiency and power are being adopted even faster. So again I think the cycle is going even faster than it had been before, especially with the new technology launches as Charles has talked about here. So things look pretty bright for us.

(Operator Instructions).

Yes, guys, can you talk -- earlier question was brought up around component availability. It looks like your inventory was up a bit on a sequential basis. Can you just update us what you're seeing on the component environment here as we move into 2011?

Yes indeed things about two or three month's ago we started to see component availability become much better, especially memory price. It has been dropped a lot in that two to three months and that's why in last quarter we did not have a shortage problem basically. And looking forward, Q1 this year basically that supply position will be in good shape.

As to our own inventory growth, like Howard just mentioned because of the Chinese Lunar New Year coming so we had to build up inventory. That makes our inventory higher. Also we believe the business will continue to grow consistently. That's why we also need to have a basically higher inventory level.

And then the other question I have is on your Europe facility ramp where do we stand relative to kind of the production that you guys can fulfill out of that facility relative to what you've done this past quarter?

Our European integration capacity will continue to grow consistently. However, it won't happen overnight, right. So European and Taipei, most locations we saw consistent growing curve and we are well prepared for that and this is another reason why we have higher inventory, because we now had to prepare inventory for Europe and Taipei as well. So when economic scale grows in both Netherlands and Taipei our business will improve as well.

Howard, in the past some of those large data center projects have been low margin and maybe it was just that they were taking advantage of certain process or transitions in any given quarter but here we. We're just in the December quarter you're calling out those customers as potentially helping gross margin so can you help sort of reconcile that?

I think once upon time we talked about our entry into the Internet data centers to help us to build scale. I think that still holds true for us that they've helped us build scale. And, as I've mentioned, our component, being able to build scale allows us to get better pricing with our vendors and therefore help our margin so it's strategically to go in the right way.

Yes and indeed that when economical scale continued to grow, like Howard has said, other costs will become better so that portion in data becomes more positive now and also indeed we are very selective and so we -- the good thing that we have some good choice to pick up the higher end newer products for data center segment and those segments indeed the margin has been good.

Yes but just as a follow-up, Howard, there were definitely some instances a couple of quarters ago where you guys took some low margin deals with some large customers. Charles is making it sound like maybe you guys are being a little bit more leveraged with these customers and you can walk away from less attractive deals. Is that what you're saying, Charles?

Yes basically. We -- for sure we've limited production capacity for sure. We had to also [be] selective.

Okay thank you.

Glenn Hanus.

Could you talk a little more about growth drivers in the next couple quarters from a product perspective? You were very strong in blades, doubling quarter-on-quarter in the GPU blade I guess. Can you elaborate on what to expect for the next few quarters?

Yes indeed our Blades will finally start to grow quickly and that's a very good sign, especially recently we just add a GPU Blade that offers a high super density and also a high performance per watt to especially HPC applications. Our GPU product line continues to grow sharply and also we introduced more storage platform, kind of quarter-by-quarter. So all of those will make our business continue to grow strongly, especially the growth in Asia with now our integration center in Taipei available we are able to support a customer in Asia much more recent than before.

And maybe just kind of at a higher level, you guys have a lot of visibility into different verticals and geos. Can you talk about sort of the relative strengths and weaknesses you're seeing in from those perspectives?

Yes I believe our Europe and Asia integration scale is still small, although it is ramping consistently, so we are paying some price for that. However, that return will be coming soon so we are happy to do those investments. The U.S.A. location now economic scale had been much better than before and that's why probably the margin has been improving consistently.

More from a just kind of a market demand standpoint, as you look across geos and verticals, can you just elaborate a little bit on what you're seeing.

Yes to further amplify Charles' comments, I think because of the production facilities we've got going on over there we've seen particular strength in Europe and Asia, quite frankly, as I mentioned earlier. Those two geos on a percentage basis grew faster actually than in the U.S. for us so we're seeing great strength out there and great opportunities for us over there, as we alluded to before.

And indeed the other in just system integration indeed we also started to grow our sales and marketing force in both the Europe and Asia market and we believe it's a high potential territory for us.

And this does conclude our question and answer session and I would like to turn the conference back over to Mr. Liang for any closing comments.

Okay 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 second quarter fiscal year 2011 conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.