超微電腦 (SMCI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Super Micro Computer Incorporated Fourth Quarter and Full Fiscal 2011 Conference Call. One note that today's call is being recorded.

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 assessed in its 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 the 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, August 2nd, 2011. A replay of the call will be assessable until midnight August 17th by dialing 1-877-870-5176 and entering conference ID #5091441. 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. 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 2011, which ended June 30th, 2011.

Before we begin, I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On August 31st we will attend the Midwest Idea Conference in Chicago and on September 14th we will attend Think Equity'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 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 Presentation 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 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, our 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 our fourth quarter. We are pleased that our fourth quarter revenue was $260 million or 11.1% higher quarter-over-quarter, and 29.1% higher year-over-year. This result is a record for Super Micro.

Non-GAAP net income was [$13 million] or 5.9% higher quarter-over-quarter, and 43.1% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.29 per diluted share compared to $0.28 last quarter or $0.21 last year. Slide five please.

In my comments today I would like to discuss our results last quarter as well as our achievements during the past fiscal year before providing some insight on our plans for the upcoming year. Last quarter was our best ever quarter for revenue, achieving a record high. In addition we reached a significant quarterly run rate for $1 billion of annual revenue.

The strong revenue came from faster growing sales of storage blade GPU and the computer rack. We also saw a significant amount of completed systems that make our total system products contribute over 40% of our revenue. Furthermore, 49% of business last quarter came from OEMs and direct customers, especially Internet data centers, which were 16% of sales.

We are pleased to see that our strategy of increasing sales of computer systems together with the higher volume OEM and direct customers has been achieved. Last quarter's margin primarily was affected by a decision we made in the March quarter after the Japan earthquake to keep higher stock of components inventory, like memory and hard drives, in order to prevent surprise disruptions for our customers. Unfortunately this quarter we saw a deep decline in price for those components and while we had been able to reduce those components inventory, the lower margin affects our result. In fact, components price continues to be weak, even into this quarter, which has [defrayed] the seasonal softness we saw in our industry.

Also affecting our margin this quarter was the higher percentage of Internet data center sales. While our products in the market segment are in strong demand and sales in high volume, this market is also highly competitive and the margin can be tighter. For the full fiscal year we recorded our highest annual revenue ever and maintained our growth trend at near 30%.

Again, we outgrew the rest of the server market, which indicated that we continue to take market share because of our strong product lines, which we continued to improve last year. In particular, our year-over-year growth in storage was 96%. For blades it was 244% and for GPU it was 72% growth.

As you know, this past year we launched our direct product line and we had seen excellent traction from our customers for these total solutions, which can belong to a data center and power up immediately. These racks now come complete with our popular rack switch with 10-gigabit Ethernet capability. In the near term our rack will be shipped with operating system loaded and containing our management software, which is now in field testing with customers. Our strategy is to continue to deliver more value add in our system solutions.

As we have discussed previously in the past fiscal year we broke ground on our new Taiwan facility. I am pleased to report that the construction is on schedule and there we have made significant progress. Strategically our Taiwan investment is important for several reasons. First, reduced production cost will enhance our margin.

Second, reduce logistic cost to support our Asia sales as well as the European sales. Third, faster time to market not just for Asia but as well due to the local help of our Asia vendors. And first reduced tax rate. So we have made a strong move in fiscal year 2011 to invest in our future growth and future profitability. We expect that we will move into the facility in dedicating the year 2011 and begin production in the first half of 2012. The full benefit of our Taiwan investment will begin in fiscal year 2013.

Last year we continued to invest in our people, growing our headcount by about 23%. The largest area headcount growth occurred in sales and in R&D. We continued to grow headcount globally as we expanded the reach of our sales force, particularly in the Asia market. In addition, we grew sales to address new technology market. They are more suitable for application optimizing solutions such as OEM and direct customers.

For R&D we invest for our future because now we have the broadest product line in our history including server, storage, blades, GPU, rack, switch and management software. We are continuing to invest in our engineering talent in order to extend our technology leadership.

As we look ahead to fiscal year 2012, we have been preparing for upcoming launch of Intel's new processor core named Sandy Bridge. We have been investing in our technology to again be first to market with the greatest product apps and the system optimization than any of our competitors. We already have a significant number of server board, power supply and chassis design tested and ready for production. While the official launch is expected to occur in Q4 this calendar year. We are ready with certain pre-sale activities with key customers.

We have also been working developing two new product segments that will have a meaningful impact in fiscal year 2012 and beyond. First, we have built from the ground up our switch product line that operates 1G layer two and layer three, 10G and 10G based [TE] layer three and fiber channel over Ethernet switch. This product line is now shipping in volume and will become an essential part of our complete rack and data center solutions.

Second we have been continuously defining our server management software over the last few years. We started with super Super Doctor, then IPMI and now we are nearing the launch of our SSM software, which is a Super Micro server management software. SSM is a software for management on power usage and server operations of small and large scale data center server deployment. SSM is part of our continuing strategy to strengthen our competitive position by providing more value to our customer with a complete Super Micro solution.

In summary, with our enhanced product lines and now our switch and new system management software, we improve the Super Micro brand as a complete solution based Company. As this product rolls out in volume production we are confident that it will produce strong growth in 2012 and beyond. Slide seven and eight please.

Also for 2012 we have some significant new developments and our new leading technology includes first, our GPU optimizing product line in 1U, 2U, 4U and Blade platform provides extreme performance in calculation intensive applications and has been the most popular GPU servers in the market. While continuing the momentum of leading the market, our new generation document GPU server including 1U for GPU and 2U [cheap] GPU support are ready for volume production now.

Our embedded server line featured in low power, low noise and (inaudible) optimized for a special server price and IPC, I mean Intel chip PC applications. This new product line will bring us additional revenue from the new market segment. Our 8-way system is targeted at the high end enterprise mission critical applications with the needs of huge memory capacity and tremendous computing power. The system has been shipped to some financial institutions and universities research labs.

Our Super Rack simplified cable management and maximized air flow for complicated [rack mount] calculations. It also allows easy access front and back optimized for our twin and double sided storage architecture. Our current environment optimized 1G, 10G, layer two and layer three switch have been volume production. Our 10G 24-port and 48-port [SAOP] products and 10G [based T] switch for Blade and the (inaudible) will be ready for production soon and are in leading position in performance and cost as we enter the 10G Ethernet era.

Our new generation micro cloud is just in production. The new version is [3U enclosure] with a UP node. It's a high density and high vision chip design made in optimized solution for hosting and cloud applications in an extremely low power consumption configuration.

Also, our long awaiting terra center management and power management software is in formal beta stage today and will be ready for formal release later this year. This software makes it easier for our customers to manage their server and storage equipment.

In summary, fiscal year 2011 was a strong year of growth and profitability for Super Micro. We are truly becoming a global Company with operation around the world and we are very pleased to report for our 18th year that continual to our trend of strong growth and profitability. For more specifics on the first 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 and accrued custom fees from prior periods.

Reconciliation of GAAP to non-GAAP is included in the financial statements of 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 $260.3 million, up 29.1% from the same quarter a year ago and up 11.1% sequentially.

The revenue for the fiscal year was a record $942.6 million, up 30.7% for the same 12-month period a year ago. The increase in revenue from last year was fairly wide spread among our customer base and product lines.

On a percentage basis blades storage and GPUs were the fastest growing product line, which have been gaining traction over the last few quarters.

The sequential increase in revenue from last quarter was primarily due to increase in Internet data center sales. On a percentage basis, storage and blade solutions were the fastest growing product line from the prior quarter. We continue to see traction in these products, which we invested in a few years ago and expect to see additional strong success from the new products, such as the switch software and full rack.

Turning to product mix, a proportion of revenues from server systems was 40.4% of total revenue, which was an increase from 32.2% a year ago and 31.8% last quarters.

ASPs for servers was $1,800 per unit, which is up from $1,400 last year and last quarter. We shipped approximately 57,000 servers in the fourth quarter and 1,540,000 subsystems and accessories.

While we continue to maintain a diverse revenue base with over 600 customers, this quarter we had one customer, which accounted for 11% of our quarterly revenues in the Internet data center vertical. Internet data center revenue was 16%, which was an increase from 9.6% in the prior quarter. Furthermore, 63.2% of our revenues came from the U.S. and 50.8% from our distributors and resellers.

Slide 10 and 11. Non-GAAP gross profit was $40.5 million, up 30.2% from $31.1 million in the same quarter last year and up 6.3% from $38.1 million sequentially. On a percentage basis gross margin was 15.5%, up from 15.4% a year ago and down from 16.2% sequentially.

Price changes from Ablecom resulted in no change to gross profit in the quarter, but total purchases representing approximately 14.9% of total cost of goods sold compared to 14.7% a year ago and 20.3% sequentially.

The year-over-year increase in gross margin resulted from an increase in sales of servers which typically have higher margins offset in part by declining in margins of subsystems and accessories.

Sequentially gross margins were down, primarily due to the sale of additional memory and hard disc drives, which we bought in response to the Japanese earthquake and a higher percentage of Internet data center revenues. The effect of the Japanese earthquake did not disrupt supply and we adjusted our inventories to reflect this. The Internet data center vertical is project based and typically very competitive.

Slide 12. Operating expenses were $22.7 million up from $18 million in the same quarter a year ago and an increase from $20.8 million sequentially. As a percentage of revenue operating expenses was 8.7%, down from 8.9% year-over-year and 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 continue to invest in headcount to drive our innovation in our product portfolio.

Sales and marketing also increased, primarily due to the growth and headcount to support the growth in revenue and the marketing of new products.

Sequentially we saw an increase in operating expenses of about $1.9 million, primarily due to sales and market expense increased by $800,000 for headcount and trade show expenses to support the growth of our products. In addition, R&D expenses grew about $800,000 related to less NRE credits from our customers as well as engineering material write-offs associated with new product development.

The Company headcount increased by 61 sequentially to 1,272 total employees. We continue o control our operating expense to leverage our growth while at the same time maximizing our opportunities for investing in the future.

Operating profit was 117.7 million, or 6.8% of revenues, up from $4.7 million or 35.7% from $13.1 million a year ago and up $500,000 or 2.9% from $17.2 million sequentially.

During the quarter we continue our building expansion in Asia which is scheduled to be completed in late calendar Q4. The expansion of our capabilities will drive our ability to service our customers and improve our operational efficiency around the world. Until then we will be making investments in infrastructure, both facilities and headcounts, in order to be able to achieve, to be able to effectively utilize new facility when it is complete.

Net income was $13 million or 5% of revenue, up $3.9 million for 43.1% from $9.1 million a year ago, and up $0.7 million or 5.9% from $12.3 million sequentially. Net income for the fiscal year was $47.7 million up 44.3% from $33.1 million for the same 12-month period a year ago.

Our non-GAAP fully diluted EPS was $0.29 per share, up $0.08 from $0.21 per share a year ago, and up $0.01 from $0.28 per share sequentially.

The number of fully diluted shares used in the fourth quarter was 44,876,000. The increase in diluted shares was primarily due to the impact of options, which were previously under water, offset in part by 414,000 shares, which the Company retired by the Company in exchange for payment of taxes due on the exercise of options.

Our non-GAAP fully diluted EPS was $1.10 per share, up $0.32 or 41% from $0.78 per share for the same 12-month period a year ago.

The tax rate in the fourth quarter on a non-GAAP basis was 26% compared to 30.2% a year ago and 28.3% sequentially. The decrease in taxes was primarily due to the tax deduction created by the exercise and sale of expiring options during the quarter. We expect the effective tax rate on a non-GAAP basis to be approximately 34% for the September quarter, which is comparable to the 35.8% in the same quarter last year.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and short and long-term investments were $75.2 million, up from $73.5 million in the prior quarter and down from $79.4 million at the end of fiscal 2010.

In the fourth quarter free cash flow was a positive $4.4 million, which reflects a $7 million payment of taxes due on expiring options for individuals in exchange for the 414,000 shares of stock which had been retired by the Company.

The net change in cash was a positive $1.8 million for the quarter.

Slide 14. Accounts receivable increased by $5.2 million to $85 million and DSOs was 29 days, a decrease of two days from the prior quarter.

Inventories decreased by $12.9 million to $192.7 million with days in inventories decreasing by nine days to 83 days. The decrease in inventory was due in part to some selling off of some of the inventory accumulated as a result of the Japan earthquake.

Accounts payable decreased by $15.2 million to $113.3 million with the days payable outstanding decreasing by 13 days to 51 days primarily due to the decrease in inventory.

Overall cash conversion days were 61 days, an increase of two days from 59 days in the prior quarter.

Now for a few comments on outlook. As indicated previously, during the fourth quarter we saw strength in sales across our broad product line, especially in blade and storage. We continue to see traction in these products, which we invested a few years ago and expect to see additional success from strong new products, such as the switch, software and full racks.

Geographically we saw strength in Asia and the U.S. but some weakness in Europe. However, September is seasonally a weak quarter for the industry an issue we are preparing for new technology launches from our partner. Therefore, the Company currently expects net sales for the quarter ending September 30th, 2011 in the range of $240 million to $260 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 outlook will not be updated until the release of Company's next quarterly earnings announcement. Notwithstanding subsequent developments, however, the Company may update the outlook for 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 2011 was another year of success and growth for Super Micro, we now look forward to a strong fiscal year 2012. Our product line has never been better than they are today with strong offering in storage, blades, GPU, twin family and our new Micro Cloud. We are continuing to invest the end product development to extend our technology leadership with the new processor architecture Sandy Bridge that will be launched in a few months and with our switch product lines as well as our server management software solutions, we are well prepared to continue our strong growth.

Finally, we will be moving into our new Taiwan facility in a few months, which will begin a new chapter for Super Micro, both in Asia and globally. Therefore, we begin fiscal 2012. We are well positioned to execute on our strategy to grow our revenue opportunity and sales and to improve our profitability in the upcoming years. 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 an opportunity to ask a question. We will then come back to you for additional questions. (Operator Instructions).

And we will go first to Mark Kelleher with Dougherty and Company.

Is it possible to split out the effect of the gross margins between the inventory pricing and the data center product mix? Is that possible? What was the effect of each?

Yes, Mark, the majority of it came out of the inventory.

Okay and as we look forward -- I'll use this as my follow-up question -- as we look forward on the gross margins, how much of that inventory effect is going to continue if we assume the prices on components stay where they are? What's the effect going into the next few quarters?

They were more likely. We did most of it during the quarter in the last quarter but there is still some and it will then be dependent upon the pricing that comes.

I guess it's some influence for September quarter but not as much as last quarter hopefully.

Okay I'll let it go then. Thanks, bye.

Glen Hanus, Needham & Company.

You gave a pretty fairly wide range on the revenue. Could you maybe discuss if you were to be sort of in the lower half of the range what would be the circumstances that that would be and then kind of the upper half of the range? What would be some of the assumptions underlying that outcome?

Yes, Glen, I mean the reason why we gave a little bit wider range is because there's some uncertainty of Sandy Bridge launch because we did not know exactly how soon the product will be in high volume so we tried to be more conservative in offering a big range. So if it is available earlier for sure our number will be better for September.

So just -- so my follow-up then on the Sandy Bridge launch are you thinking that it has versus what you were expecting a couple months ago, has it slipped out and can you sort of quantify the slip?

As of this moment we heard it's still Q4 but how there the Q will be we do not know at this moment. But our product has been pretty ready though so once the CPU chips are is ready we are ready to go.

Okay thank you.

Aaron Rakers, Stifel Nicolaus.

Two questions I guess; I want to go back to the gross margin number. Just so I am clear, what was the sequential -- can you help me understand the sequential change in your systems gross margin because I think you guys had made a comment that the incremental mix, 16% coming from Internet data center clearly drove gross margin down so I am curious. Are you telling us that the systems gross margin was essentially flat sequentially or was that down 200 basis points? I am just -- you know, any clarity there would be helpful.

Yes, Aaron, this is Howard. With regard to the gross margin, yes the server gross margins themselves are generally higher than our overall subsystems and access rate. However, as I talked about the memory and hard disc drive, again that kind of permeates both the server margins and the accessories and subsystems because obviously you either sell it separately to some of our partners or you put it into the system. So that had effect on both.

And the second point we brought up was basically the Internet data center. That's a very competitive area, the market and I think you can go back historically. There are times when we've had higher percentages of our sales in that vertical and that we have taken some margin hit because of that.

And kind of keeping with that, at 16% of revenue clearly that's on a significant growth trajectory, albeit lumpy and project driven. How do we think about that contribution as we move forward and kind of thinking about that as well on a gross margin line? I mean, do we expect continued growth from here? I mean, what's your assumption for this next quarter and looking forward as far as contribution.

I believe it's our interest to continue to grow data center cloud business. However, our Asian operation kind of our Taiwan facility will be ready in next few months. Once that's ready for sure that will lower our cost and we are aggressively making that happen.

Okay thank you.

Rajesh Ghai, ThinkEquity.

On the Internet data centers are you selling systems or is that subsystems and how much lower is the gross margin for both systems, subsystems or Internet data centers?

Again, Internet data centers are primarily full servers. We usually put the boxes together for them and then they ship them out to them.

With regard to servers versus subsystems and accessories, on an overall basis we've said there could be as much as a 5% to 10% gross margin differential between the two categories.

Okay and can you update us on the specific timing of the Taiwan facility coming on stream and when it be fully ramped and also if you could talk about the utilization rate of the Netherlands facility and when you expect that to be fully ramped? Thank you.

Yes I mean we start our Netherland facility about 12 months ago, 18 now, 18 months ago. However, our European market has been stalled in the last six months so that kind of slowed our utilization of our Netherland facility. And also Asia, again Asian market is growing quickly but our Taiwan facility won't be fully ready in about four months to go, four to five months to go. So after that for sure. Once our utilization becomes higher in both Europe and Asia, the gross margin will improve.

Thank you.

(Operator Instructions). From Sterne Agee we'll go to Alex Kurtz.

Good afternoon. This is Amelia in for Alex today. Thanks for taking the question. in terms of your gross margin line, outside of structural changes you're making to the supply chain to improve the margin, which new products are you seeing that could help drive margin upside the most in the next year or so?

I guess GPU will continue to have slide and storage we continue to have a storage product line growing quickly and switch. Switch is relatively new product line and that product line for sure has a much better margin.

Okay great and then as my follow-up, could you give us some color on your expectations of OpEx growth quarter-over-quarter from June to September? Are you seeing that as roughly flat or growing? Thank you.

Yes we have -- we think taking good control of our Op expenses. We go through an annual review cycle for our employee base in September so you'll see some expenses for payroll but generally we kept it fairly close to what our percentage of revenue has been in the past.

All right great. Thank you.

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 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 fourth quarter fiscal year 2011 conference call. We do appreciate your participation. You may disconnect at this time.