超微電腦 (SMCI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro Computer Incorporated Third 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.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. As a reminder, this call is being recorded today Tuesday, April 26th, 2011. A replay of the call will be accessible until midnight May 10th by dialing 1-877-870-5176 and entering conference ID number 2371871. 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 Supermicro's conference call on financial results for the third quarter fiscal year 2011, which ended March 31st, 2011. 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 remarks include forward-looking statements. There are a number of risks factors that could cause Supermicro'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 of Supermicro'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 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 third quarter. We are pleased that our third quarter revenue was $234.3 million or 24% higher year-over-year and 2.7% lower quarter-over-quarter. Non-GAAP net income was $12.3 million or 37.2% higher year-over-year and 8.1% lower than last quarter.

Supermicro's non-GAAP earnings per share was $0.28 per diluted share compared to $0.21 last year and $0.31 last quarter. Slide five please.

Now I would like to share with you some key points regarding our operating performance in the third quarter. We are pleased that we increased our revenue year-over-year by nearly 24% in the March quarter. The March quarter is seasonally our industry's softest quarter and our strong performance in this quarter indicates that the IT market demand is robust and continues to have momentum for the remainder of this calendar year.

In the March quarter due to the delay of Intel's new chip, a new single processor, Sandy Bridge product we were impacted by the timing of some key projects for complete system solutions, which were strong in the previous quarter. However, we were able to grow other subsystems solution to offset this softness. We expect this demand for system solutions to rebound in the upcoming quarter due to the enhanced system performance.

We also experienced a little impact from the earthquake in Japan on a limited number of components, which affected some availability and price. For those certain components we have planed second source and have been working with the supply chain to ensure availability at a best cost going forward. Also, to a minor extent, we saw some reduced revenue from Japan, which impacts us a little during March but should not be a major factor going forward.

Supermicro also has busy developing our new X9 generation dual processor and MP product lines, including many server boards, chassis enclosure, and some more solutions and power supplies as well as new rack architecture for leveraging the Sandy Bridge processor technology. These next generation product lines will be fully optimized for the highly power efficient HPC cloud and data center demands.

Let me go over some strong results from our key product lines in the March quarter. First, our storage sales grew by almost 50% over the previous year, especially the double-sided storage solutions have grown steadily now for several quarters and are more than doubled from six months ago. Our storage platforms have been used in data centers and enterprise solutions and our partnership in storage continued to grow.

Second, our blade solutions continued to grow this quarter after almost doubling in the previous quarter and are up over 280% from a year ago. This result showed a strong momentum in demand for our blade solutions. Our TwinBlade solution that was launched the last quarter has been especially popular due to the superior density, power efficiency and performance over any competing brand.

Third, our March quarter GPU product line had continued to grow from the strong December quarter. This result for March is 81% higher than it was a year ago, which shows that Supermicro technology leadership and innovation in GPU solution is generating demand. Our GPU optimizer product lines in 1U, 2U, 4U and now in blade provided the highest density available for computational and graphic intensive applications.

Geographically in the March quarter we saw our oversea percentage of revenue continue to grow as a percentage of total revenue. North America revenue was approximately 53%. European revenue was approximately 23% and Asia was about 20%. The Asia region grew strongly last quarter and is quickly becoming our fastest growing region, although our economical scale is till small in Asia. Our pressure in this region is huge.

We are growing our partnership in China, Japan, Singapore, Korea and India. The China market has been a special focus area for us recently and we are winning businesses with key partners that will allow us to grow quickly in China.

As an update to our Taiwan investment, we have broken ground on the first phase of our new facility in Taiwan. We expect that this first phase will be complete by the end of this calendar year and we'll be ready for production by the first quarter of calendar 2012. Naturally, as we make this investment in our fiscal infrastructure, we are also building up our operating employee base to support R&D production, G&A and of course sales and marketing.

While we will balance our growth in these paths to match our sales growth as much as possible, this investments impacts operation expense. The focus we have been giving Asia is showing results and the investment we are making in building our infrastructure in Taiwan will support this region for years to come.

Let me now share with you something about our product line. They are gearing up for upcoming quarters. Slide six and seven please. Along with some new development our leading technology includes, first, our Twin Architecture for 1U and 2U platforms continue our technology leadership momentum. The 2U Twin Cube will set another highlight in computational ST. Our award winning TwinBlade is in high volume production now featuring 20 DP nodes in a 7U blade with 40 gigabit per second Infiniband or 10 GbE connectivity option.

Our GPU optimizer product line in 1U, 2U and 4U and blade platform provide extreme performance in calculation intensive applications and have been the most popular GPU server in the market, while continuing the momentum of leading the market. Our next generation (inaudible) GPU system including 1U for 4 GPU support and 2U for 6 GPU support product will be available in the coming May.

Our embedded server line featured in low power, low noise in its [muffle frame] optimizer for special server application, special server appliance and IPC applications. This new product line will bring us additional revenues from the new market segment. Also, our 8-way system is targeted at high-end enterprise mission critical applications with the need of huge memory capacity and tremendous computing power. The system has been shipped to some key financial institutes and a university research lab with great feedback.

Our SuperRack simplified cable management and maximized airflow for complicated (inaudible) calculations. It also allows easy access front and back optimized for our twin and double-sided architecture. Our 10G switch for blade and standalone box are in leading position in performance and pricing as we enter the tenth year [SSM] market.

Finally, our new generation MicroCloud is in prototyping space now. It has even higher density and higher efficiency design, which is an optimized solution for web hosting and cloud applications in an extremely low power consumption congregation.

In summary, we are entering the final quarter of our fiscal year. We are confident that we will have a strong finish. With our storage blade GPU and complete rack solution the Supermicro brand awareness continues to grow in the IT market. We look forward to promoting this product line in the upcoming quarter and beyond.

For more specifics on our third 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 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 third quarter income statement. Please turn to slide eight. Revenue was $234.3 million, up 23.8% from the same quarter a year ago and down 2.7% sequentially.

The increase from revenue from last year was due to the continuation of the server refresh cycle and the continuing ramping of our optimized products. The growth on a percentage basis was primarily in blades and GPU solutions. The sequential decrease in revenue was primarily due to seasonal weakness in the industry and reduction in OEM and end customer orders from the December quarter. We expect some of the customers to increase orders during the seasonally strong June quarter.

On a percentage basis storage solution was the highest increase from the prior quarter. Slide nine.

Turning to product mix, the proportion of revenues from server systems was 31.8%, which was a decrease from 33.6% a year ago and 40.5% last quarter. ASPs for servers was about $1,400 per unit, which is down from about $1,500 and $1,600 per unit last year and last quarter respectively.

The decrease in ASP during the quarter was primarily due to a decrease in volumes from some higher ASP projects from our OEM and end customers. We do expect some of these to return this quarter. The increase in absolute dollars of server products from a year ago was primarily due to the increase in shipments across our server product lines. The decrease in absolute dollars of server products sequentially was primarily due to a decrease in shipments of servers, primarily to our OEM and end customers.

We shipped approximately 53,000 servers and 1,150,000 subsystems and accessories in the third quarter. The increase in insurgence of subsystems and accessories was primarily related to customers purchasing additional inventory during the -- due to the potential shortage, which the Japan earthquake could produce during the current quarter, similar to what we did during the quarter in building up our inventory to minimize risks of supply-chain disruption.

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 third quarter. Furthermore, 53.6% of our revenues came from the U.S. and 60.5% from our distribution and resellers.

Internet data center revenue was 9.6%, which was higher than the prior quarter of 9.4%. Asia and Europe revenue continue to grow faster than the U.S. Slide 10 and 11.

Non-GAAP gross profit was $38.1 million, up 29.6% from $29.4 million in the same quarter last year, and down 5.7% from $40.4 million sequentially. On a percentage basis gross margin was 16.2%, up from 15.5% a year ago and down from 16.8% sequentially. Price changes from Ablecom resulted in a positive 2 basis point change to the gross profit in the quarter with total purchases representing approximately 20.3% of total cost of goods sold compared to 19.9% a year ago and 23.1% sequentially.

The sequential decrease in gross margin primarily resulted from a higher percentage of subsystems and accessory revenues, as noted earlier, which typically sell for less margins than service solutions. This was caused by lower revenues from some of our OEM and end customers who order on a project basis.

We do expect to see some improvement in this quarter. In addition, we saw some increase in purchases from our partners in subsystems and accessories toward the end of the quarter due to the uncertainty with regards to the effect of the Japanese earthquake on supply. We also have bought some additional inventory in some subsystems and accessories in order to minimize the effect of any delay in supply chain caused by the earthquake. Slide 12.

Operating expenses were $20.8 million, up from $17.3 million in the same quarter a year ago and down from $21.6 million sequentially. As a percentage of revenue, operating expenses were 8.9%, which is lower than 9.1% a year ago and 9% sequentially. Operating expense was higher on an absolute dollar basis year-over-year primarily due to additional headcount in R&D and production as the Company continues to invest into our product portfolio as well as expand its operations, both domestically and overseas.

Sequentially we saw a decrease in operating expenses primarily related to higher NRE support from our customers for specific optimizations to products as well as a reduction in overall bonuses. The optimizations are along the lines of power efficiency, [gen C] and cooling, which the Company is the leader in.

Headcount increased by 75 sequentially to 1,211 total employees. The increase was primarily in production and R&D.

Operating profit was $17.2 million, or 7.3% of revenue, up from $12.1 million or 6.4% of revenues a year ago and down from $18.8 million, or 7.8% of revenues sequentially. During the quarter we broke ground on the first phase of our building expansion in Taiwan, which is scheduled to be completed in late calendar Q4. The expansion of our capabilities will drive our ability to service our customers in that geography as well as help with improving our operational efficiencies around the world. Until then we will be continuing to make investments in infrastructure, both facilities and headcount, in order to be able to effectively utilize this new facility when it is completed.

Net income was $12.3 million or 5.2% of revenues, up from $8.9 million or 4.7% of revenues a year ago and down from $13.3 million, or 5.5% of revenues sequentially. Our non-GAAP fully diluted EPS was $0.28 per share, up $0.07 from $0.21 per share a year ago and down $0.03 from $0.31 sequentially. The number of fully diluted shares used in the third quarter was 43,982,000. 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 third quarter on a non-GAAP basis was 28.3% compared to 25.7% a year ago and 28.3% sequentially. The lower rate a year ago was due to additional R&D tax credits. We expect the effective tax rate on a non-GAAP basis to be approximately 31% for the June quarter.

Turning to the balance sheet on a sequential basis, slide 13, cash and cash equivalents and short- and long-term investments were $73.5 million, which is down from $92.7 million in the prior quarter. In the third quarter free cash flow was a negative $34 million and the net change in cash was a negative $19.1 million. The primary difference between free and net change in cash was due to the purchase of $9 million of land during the quarter, which the Company financed. The primary cause of the negative change, net change, in cash was due to the increase in inventory of $19.1 million during the quarter to prepare for the increase in forecasted revenues and buffer against disruption of supply of some subsystems and accessories.

Slide 14. Accounts receivable increased by $2 million to $79.8 million and DSOs was 31 days, an increase of two days from the prior quarter. Inventories increased by $18 million to $205.6 million with the days in inventories increasing by 14 days to 92 days. Accounts payable decreased by $15.5 million to $128.5 million with the days payable outstanding increasing by five days to 64 days, primarily due to the increase in inventory. Overall cash conversion cycle was 59 days, an increase of 11 days from the 48 days in the prior quarter.

Now for a few comments on outlook; as indicated previously, during the third quarter we saw seasonally soft quarter for the industry. However, our growth has continued from the prior year, especially in Asia and Europe. We expect to see continued ramping of these regions as we add more capabilities there as well as continue to introduce more products based on the latest technologies. The fourth quarter is typically a seasonally strong quarter and is starting stronger than it did prior quarters.

Therefore, the Company currently expects net sales for the quarter ending June 30th, 2011 in a range of $245 million to $260 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.28 to $0.30 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. As we enter the first quarter of our fiscal year we are confident that we have a strong quarter to complete the best year in our history. With our strong product line in blade, storage, GPU and [recommended] server we are well positioned to take advantage of current IP market strength. In addition, we are growing in all our geography markets and especially in Asia. And finally, we are well prepared for upcoming technology change with innovation that will generate a new demand for Supermicro products.

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 the queue has had an opportunity to ask a question. We will then come back to you for additional questions. (Operator Instructions). We'll take our first question from Aaron Rakers with Stifel Nicolaus.

Couple -- well, one question, one follow-up I guess; as far as the effects that you guys had sited in the this last quarter, I think it was the timing of some refreshes or some launches from some of your partners and then also the effect both from Japan component supply as well as Japan as a contribution of revenue. Can you help us bridge the effects there quantitatively how meaningful those items were?

Okay I mean yes. Intel has a Sandy Bridge UP, a CPU launch that they have oh I guess almost four months so therefore (inaudible) on more shipments, not big but some, and as to Japan earthquake yes we have some components that got a little impact. However, we have aggressively looking with second source and also preparing more safety inventory, so pretty much we have no concern about Japan earthquake anymore and but you stated, we for sure have a higher inventory. That's to try to make sure of no other impact.

And the follow-up for me is on the gross margin line. It would appear that, given what you guys are saying about the guidance going into next quarter, we're not to assume any kind of real meaningful change on the gross margin line so first of all if that's true -- is that true? And then secondly, how should we anticipate the trajectory of gross margin here as you look to continue to ramp your international facilities and importantly looking into 2012 with the Taiwan facility ramp?

Like in last couple quarters, we share with you our Taiwan investment like in facility and R&D logistics. There for sure we have created some expense for us in short-term and however, since the improvement quarter-after-quarter and now the Asia billings have been growing but the economic [slide] in Asia is still small relatively so I believe we may need another two to three quarters to get a better economic scale for Asia.

Mark Kelleher, Dougherty & Company LLC.

You mentioned that you had some strength in the GPU systems in the quarter; the ASPs on servers came down a bit sequentially. Could you kind of talk about which products drive that ASP up and which drive it down and what were some of the dynamics there? I would assume some of the blade servers might have pulled it down a bit.

Yes, Mark, this is Howard. Like I said, we had some projects that, as Charles alluded to, possibly got delayed a bit. We also had some customers, some OEMs and end customers that delayed so again we do expect some of the projects to come back. I mean, they are -- the systems can vary from multiple thousands of dollars to less so the mix really just changed for us from some of those customers.

Okay and I'll use my follow-up question to ask the inventory build, fairly substantial, can you be more specific on what's in there? Is that DRAM? Is that -- what's in there?

You are very familiar with the market. Yes to prevent a shortage from Japan earthquake, we keep more memory, more hard drive and also more capacitors, I mean especially high voltage capacitor to make sure we won't have a shortage in Q2 -- I mean June quarter and even September quarter.

(Operator Instructions). Rajesh Ghai, ThinkEquity.

You mentioned that you expect your systems revenue as a percentage of your total revenue to snap back next quarter. Can you just give me the factors that give you the confidence that it will snap back next quarter?

Okay I mean, again, last quarter we have a couple of product lines were a little bit delayed right including 2U storage product and that had been a fixed in last couple of weeks so this quarter, I mean the June quarter, systems shipments should be better than last quarter. As to how many percent, Howard, do you have an idea?

Yes, Rajesh, like we stated our long-term goals would be about 50/50 and we'll be working our way through there but, again, June is a seasonally strong quarter for us so, again, last quarter was a weak quarter. Some of the projects that we usually have full service solutions into were not there. They're coming back this quarter.

Okay and as relates to pricing, can you talk about the pricing dynamic that you see at this point in time, both for your products as well as for components, specifically memory and hard disk drives? Thank you.

Not much but, again, to prevent a shortage may happen, right, so we keep a higher inventory level and therefore for sure we pay a little bit higher, again not too much higher.

And in terms of pricing competitively compared to your competitors?

I believe our economic scale still relatively is smaller than our main competitor and that's why we have been consistently growing our market share and last year we grew 43%. This year for sure we foresee a good year in market share growth as well, including our investment in Asia, not [all types] who will grow our market share so that long-term we will be stronger in purchasing bargain power.

Glenn Hanus, Needham & Company.

Let me just take another crack at the -- can you give us a sense of the -- I mean data center spending is pretty strong. You came in at the low end of the range. Should we assume that absent the delays in Sandy Bridge that you might have been towards the upper end of your range based on demand or is that too positive?

No, Glenn, I don't think that's too positive at all. I think some of those things that Charles reiterated too and we reiterated with regards to delays caused, again, we're talking our range is about we're at 134. We were at 135 to 145. I mean, if we take a look at that that's not far off in there so some of these delays obviously would have put us right in there.

And then the delays, did they more impact the complete system solutions rather than the components? Did the delay impact the mix in effect between solutions and components? So can you just help me understand that better?

Yes if you look at our mix, again, you saw that our systems revenues as a percent of our overall business went down from the December quarter to the March quarter so, again, I would put the impact more on that side of the fence.

Yes I understand that. What I am asking is did the Intel delay create that change in mix?

No. Indeed the major reason our ASP dropped because some key accounts, they purchase [in the line] December and we believe we will be purchase in June quarter again so March quarter somehow they just have a minimal order.

(Operator Instructions). Aaron Rakers, Stifel Nicolaus.

Yes can you guys, just to follow up on the Sandy Bridge stuff, can you talk a little bit about how we should think about the [Romley] transition as we look out over the next couple quarters from a timing perspective and any thoughts of how we should think about that from a margin profile perspective?

Yes I mean our Intel Sandy Bridge for sure is a big product line and whenever they are big product launch from our partner like Intel, we have a good chance for Supermicro to grow because we are now in new products come to market, right, so basically Sandy Bridge we have been brought in production by Q4, I mean December quarter, but we are kind of operationally preparing for the product so basically, like what Howard said, June is our traditional strong quarter and then second half of this year with Sandy Bridge launch for sure will be a good quarter for us.

And then another question on the storage side of the business obviously you've been talking about that and that growing quite rapidly; are we a quarter or two away before you tart actually breaking that out? And on that topic have you seen any effect from some of the recent consolidation things going on in the storage industry, in particular NetApp buying LSI? Have you engaged in new customer opportunities that are as it relates to that?

We have a very broad customer base for storage products so basically the acquisition activity along a couple, a few companies in last two quarters, basically I would have said no impact to us.

Okay.

Our growth pretty much depends on our strong product line.

Okay thank you.

Rajesh Ghai, ThinkEquity.

So during your guidance, Howard, if I take the mid point of your revenue and your mid point of the EPS and back out the operating margin it comes to almost flat with last quarter. Can you kind of spell out the operating margin or operating expense and gross margin resumptions for next quarter if I understand systems as in your mix is going to go up and how does that kind of -- how do you get to a flat operating margin with the higher gross margin potentially?

I believe again June quarter should be stronger to us as traditional, right. However, because the earthquake in Japan we still tried to be conservative in case any shortages may happen. Otherwise June quarter should be stronger than March quarter to us for sure.

Okay and on the Netherlands facility you mentioned Europe was strong. I am just wondering what the utilization rate is at this point in time for your Netherlands facility. Is it 50% or more and have you seen any impact on -- positive impact on gross margin as a result of the elimination of freight costs to Europe?

Yes indeed both Netherlands and Taiwan facility still under economic scale and that's why our Q1 we got some impact and the good thing is those utilizations will consistently improve quarter-over-quarter.

And the Taiwan facility should be ramping by the end of June this year? Is that -- am I -- is that the right information that I have?

Taiwan indeed also has need to be more patient because our investment in Taiwan will be huge and long term. I would rather say the cost of building will be final, will become greater by December quarter and then next year we will see a better economic scale for sure.

Okay and when does Intel start its Sandy Ridge DP allocation? Is it September quarter or could it be -- is it it's in the September quarter but is it going to be end of September or is it going to be earlier in that quarter?

I believe the high volume will be Q4.

Q4 okay thank you so much.

Glenn Hanus, Needham & Company.

As you look at your Internet data center business, would you foresee that it's been in sort of this 9% range for a couple quarters. Would you, as we look out into next fiscal year, would you foresee that growing into double-digits?

I believe it will be consistently growing and will be double-digit very soon.

I'm sorry I just didn't understand.

I guess it will double-digit very soon.

Okay, okay, how about back on operating expenses, I mean I had modeled up this quarter sequentially in OpEx. It looks like you came in under in all my categories. Did -- was that just a function of revenues or was -- is there something that changed during the quarter in your operating expense expansion?

Again, it's two areas. One is we spent a lot of effort and resource in developing Sandy Bridge for the big launch that will happen in Q4. And secondly, lower growing expense in Asia to make sure our foundation is Asia is strong enough.

Okay thank you.

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

Thank you for joining us today and we are looking forward to talking to you again at the end of this quarter. Thank you, everyone. Have a great one.

Thank you, ladies and gentlemen. That does conclude the Supermicro third quarter fiscal year [2010] conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.