超微電腦 (SMCI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computers Incorporated Second Quarter Fiscal 2012 Conference Call. The Company's new 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 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 Tuesday January 24th, 2012. A replay of the call will be accessible until midnight February 7th by dialing 1-877-870-5176 and entering conference ID number 4396394. 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 and financial results for the second quarter fiscal year 2012, which ended December 31st, 2011.

Before we begin I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On February 11th we will attend the Stifel Nicolaus Technology and Telecom Conference in Dana Point, California, 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 on the Company's website under the Events and Presentations tab. Please turn to slide two.

Before we start I'll remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2011 and other SEC filings. All of those documents are available from the Investor Relations page at Super Micro's website at www.supermicro.com. We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures please refer to slide three of this presentation or to our press release published earlier today.

In addition, a reconciliation of GAAP to non-GAAP 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 second quarter. The second quarter revenue was $249.9 million, or 0.8% higher than last quarter, and 3.8% higher year-over-year. Non-GAAP net income was $11.2 million, or 6.5% higher quarter-over-quarter, and 16.3% lower compared to last year.

Super Micro's non-GAAP earnings per share was $0.25 per diluted share compared to $0.24 last quarter or $0.31 last year. Slide five please.

Demand and backorder for our products was strong in the December quarter. At the same time the December quarter was challenging mainly due to the flooding in Thailand that affected our hard drive supply chain. As a result, we were unable to fulfill customers' demand due to the lack of hard drives. While we have some hard drive stock at the beginning of the quarter, our source for hard drives were unable to fulfill our needs when we reached the end of the quarter.

In the beginning of the new quarter, I mean the March quarter, the situation however has improved a little on recovery of hard drive supply but it is not expected the hard drive supply will quickly return to a normal state in this quarter. Again, the demand for our products is even stronger as we enter this quarter and we have strong backlog of orders that will depend on hard drives. We are working through these orders of the hard drive quantity becoming more available in the near future.

In the December quarter we did a good job of [seeding] our X9 Sandy Bridge platform [samples]. We have many high volume customers and data centers in evaluation of our new Sandy Bridge base product lines. This quarter we are continuing with these deployments to broaden awareness of our readiness to supply the new products as soon as the official launch from Intel occurs.

From the geographical perspective this quarter the United States accounts for 56.7% of revenue. Europe was 23% and Asia was 18%. Sequentially the US and Europe were each 0.6% lower while Asia was 2% higher. On a year-over-year basis we are pleased to see the continued growth in our Asia business, which was 2.2% higher.

Also, in spite of the headwinds with the Europe debt crisis, our Europe business was 4.2% higher than last year. Last quarter OEM and direct customers account for over 44.2% of revenue and Internet data center was 9.7% of total revenue as a result of the strong OEM and direct business. Systems sales was -- also continued to be strong and account for over 44% of the sales.

I mentioned earlier about seeding and sampling activity of our Sandy Bridge solutions from last quarter. They are made possible by investing heavily in R&D to meet the technical challenge on the new platforms. We had approximately 15% more engineers to our R&D group in the past two quarters as we had stayed before. It is very important to keep investing in our engineering staff in order to maintain our time to market advantage and maintain strong leading technology innovation.

Let me emphasize again that TTM, time to market and innovation, are essential to our growth and profitability. While our new Sandy Bridge solutions will offer customers the best performance at a lower power consumption solving the complexity of new platform requiring strong engineering skills, Sandy Bridge product lines will provide a unique opportunity for Super Micro to demonstrate the power of its engineering advantage.

I would like to provide you with an update on our capacity expansion. Last quarter we completed our Taiwan facility and began erecting production lines and moving in some of our people. On January 6th we hosted a grand opening event that was attended by high level government officials, including the Vice President of Taiwan. We expect to have production [going out] of [two lines] during this quarter.

This is really a remarkable achievement in our effort to improve the logistical foundation of Super Micro, which will lead to a lower production and logistical cost. In addition, it will allow us to grow more quickly in Asia as well as in Europe at an attractive cost to the Company and to our customers.

Regarding our current products, storage and blades grew strongly year-over-year. Rack solutions and GPU remain strong but were a little bit weaker sequentially. Our recent launch of new products such as networking switch, MicroCloud and 8-way servers continue to grow steadily.

However, the story of 2012 in our industry will be technology transition to Sandy Bridge. Given the increased performance and less power consumption, customers will be able to improve their TCO and ROI from IT investment by adopting Sandy Bridge. We expect that demand will be strong because it's been three years since the last major technology transition. As I mentioned before, Super Micro has invested heavily in R&D to be able to have the broadest array of Sandy Bridge choice to offer to the market.

Most of our current systems and storage architecture will undergo the Sandy Bridge upgrade to get a performance boost. In addition, we will have an exciting new architecture creation that will be introduced at the end of this quarter, which will further optimize our Sandy Bridge product line.

Let me now update you with more details on our new and leading technologies. Slide seven and eight please. Our new X9 Sandy Bridge DP solutions are in sample stage now. We targeted this much for high volume product release. We will update our [introductory] platform such as Twin and introduce new architecture such as WIO. The new X9 platform features additional memory, higher PC Express performance and bandwidth and much better CPU overall performance while consuming less power.

Most of the new systems will also feature the new generation high vision digital power supply that can reach more than 94% efficiency in both light and heavy loading.

The other unique solution that will be featured in our X9 server storage product lines is high temperature operation capability. This solution will make fully air cooling become easier and help customers achieve a PUE of 1.1 or even better. The AMD Interlagos solution are in mass production now. It offers up to 16-core per CPU and supports a 1600 megahertz memory seat, which has proven very popular among HPC and other applications.

Our GPU optimized product line, 1U, 2U, 4U and blade performance platform provide extreme performance in calculation of our [versatile] intensive applications and have been the most popular GPU server in the market while continuing the momentum of leading the market. Our latest rack mount GPU system includes 1U 4GPU and 2U 6GPU, are in high volume production now.

Our embedded server line featuring low power, low noise as [multi frame] optimized for special server appliance and IPC, industrial PC applications. This new product line brings us additional revenue from the new March segment.

Also, our new work station product line featuring a new work station (inaudible) with a high efficiency super quiet power supply and high performance IO support, our new specialized work station product line to support [Everest] process from Intel, optimizes our HFT, high frequency trading application.

Our current environment optimize 1U, 1G, 10G switch has been in high volume production. Our 10G 24-port and 48-port SLP processor and 10GB T switch for blade and standalone post will be ready for production soon and are in leading position in terms of performance and cost.

Our new MicroCloud feature is in high volume production now. The first version is 3U in (inaudible) with a UP node. It's a high density and high vision seat design making it an optimized solution for hosting and cloud applications in an extremely low power consumption combination.

Our complete rack solution has been successfully deployed to several data centers. With our increasing engineering expertise and long hours putting quality control, the direct shipment of complete racks provide the customer (inaudible) of power and convenience and trouble free experience. We are exciting. We are expecting faster growth of our complete rack solution business in the near future.

For more specific detail on the second quarter, let me turn it over to our CFO, Howard.

Thank you, Charles, and good afternoon, everyone. I will 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 to GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release and in the supplement detail in the slide presentation accompanying the conference call.

Let me begin with a review of the second quarter's income statement. Please turn to slide eight. Revenue was $249.9 million, up 3.8% from the same quarter a year ago and up 0.8% sequentially. The increase in revenue from last year was primarily due to server solutions, which incorporated our growing, storage and blade product lines as well as ramp of our full rack solutions.

The sequential increase in revenue from last quarter was primarily due to the growth in our server solutions, such as blades and our new MicroCloud solutions offset in part by shortages in hard disk drives caused by the Thailand flood.

On a percentage basis blades and MicroCloud were the fastest growing product lines from the prior quarter. Slide nine.

Turning to product mix, the proportion of revenues from server systems was 44%, which was an increase from 40.5% a year ago and from 39.4% last quarter. ASPs for servers was $1,800 per unit, which is up from $1,600 last year and up from $1,700 last quarter. We shipped approximately 62,000 servers in the second quarter and 998,000 subsystems and accessories.

We continue to maintain a diverse revenue base with over 500 customers with none of these customers representing more than 10% of our quarterly revenues.

Internet Data Center revenue was 9.7%, which was an increase of 9.2% in the prior quarter. Furthermore 56.7% of our revenues came from the US and 55.8% from our distributors and resellers. Slide 10 and 11.

Non-GAAP gross profit was $42.8 million, up 6.1% from $40.4 million in the same quarter last year and up 7.5% from $39.8 million sequentially. On a percentage basis gross margin was 17.1%, up from 16.8% a year ago and from 16.1% sequentially.

Price changes from Ablecom resulted in no change to gross profit in the quarter with total purchases representing approximately 18.5% of total cost-of-goods sold compared to 23.1% a year ago and 18% sequentially.

The year-over-year increase in gross margin resulted from increases in sales of server solutions, which typically have higher margins as well as a higher margin due to hard disk drive pricing.

Sequentially gross margins were up due primarily to increases in hard disk drives caused by the Thailand flood as well as increase in percentage of server solutions, which typically have higher margins. Slide 12.

Operating expenses were $26.6 million, up from $21.6 million in the same quarter a year ago and up from $24 million sequentially. As a percentage of revenue operating expenses was 10.6%, up from 9% a year-over-year and 9.7% sequentially. Operating expenses was higher on an absolute dollar basis year-over-year and sequentially. The year-over-year increase was primarily due to R&D as we continue to invest in our product portfolio essentially in preparation for the Sandy Bridge launch.

Sequentially we saw an increase of operating expenses of about $2.6 million, primarily due to R&D expense growth by about $1.8 million related to salary and benefits to support the new technology launches. In addition, general administrative expenses grew by about $600,000, primarily due to moving expenses.

The Company's headcount increased by 57 sequentially to 1,395 total employees, primarily in R&D.

Operating profit was $16.2 million, or 6.5% of revenues, down from $2.5 million, or 13.5% from $18.8 million a year ago and up $0.4 million, or 2.4% from $15.8 million sequentially.

Our first building in Taiwan was completed on schedule at the end of December. This expansion will drive our ability to service our customers and improve our operational efficiencies around the world.

Net income was $11.2 million, or 4.5% of revenues, down $2.2 million or 16.3% from $13.3 million a year ago and up $0.7 million, or 6.5% from $10.5 million sequentially.

Our non-GAAP fully diluted EPS was $0.25 per share, down $0.06 from $0.31 a share a year ago and up $0.01 from $0.24 per share sequentially. The number of fully diluted shares used in the second quarter was 44,625,000.

The tax rate in the second quarter on a non-GAAP basis was 30.5% compared to 28.3% a year ago and 33.1% sequentially. The increase in the tax rate from the prior year was primarily due to the R&D credit expiring on December 31st, 2011. The decrease in the current quarter from the prior quarter was due to an increased investment in R&D. We expect the effective tax rate on a non-GAAP basis to be approximately 31.5% for the March quarter, which is higher than 28.3% 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 $106.1 million, up $10.1 million from $96 million in the prior quarter and up $13.4 million from $92.7 million in the same quarter of last year.

In the second quarter free cash flow was positive $4.4 million.

Slide 14; accounts receivable decreased by $7.7 million to $80.1 million with DSOs was 31 days, a decrease of one day from the prior quarter.

Inventories increased by $4.4 million to $93.4 million with the days in inventories increasing by one day to 85 days. The increase in inventory was due in part to prepare for the upcoming Sandy Bridge launch.

Accounts payable decreased by $7.7 million to $115.9 million with today's payables increasing by one day to 53 days primarily due to the timing of payments to vendors.

Overall cash conversion cycle days were 63 days, a decrease of one day from 64 days in the prior quarter.

Now for a few comments on outlook; as indicated previously during the second quarter, we saw strength in our broad product lines. We have continued our sampling of presales activity for Sandy Bridge solutions, which are very complicated but promise to deliver many benefits to our customers. However, while our demand for our product was strong, we were unable to deliver due to the shortage of hard disk drives caused by the Thailand flood.

So, as we enter March quarter, which is seasonally a weak quarter for the industry, we have strong demand as indicated by our current backlog and we are continuing to work with our vendors and partners to minimize the impact to our hard disk drive supply. The situation has improved since October 2011 when the flood occurred.

In addition, we completed construction of our Taiwan facility and had our grand opening on January 6. We will be starting to ramp the facility and putting inventory in place to support the increase in final tests and assembly capabilities.

Therefore, the Company currently expects net sales from the quarter ending March 31st, 2012 in a range of $240 million to $270 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.19 to $0.27 for the quarter.

It is currently expected that the outlook will not be updated until the release of the Company's next quarterly earnings announcement notwithstanding subsequent developments. However, the Company may update the outlook or any portion thereof at any time.

With that, let me turn it back to Charles for some closing remarks.

Thank you, Howard. In summary, that strong demand from our customers demonstrates the power of our business model to be first to market and it demonstrates the power of our brand as a technology innovator. With our Asia production and logistics facility now fully ready and with the upcoming Sandy Bridge launch our investment has almost come to fruition.

Our engineering team has produced the strongest and the broadest product line than any competition. Calendar 2012 will be the year of technology transition to Sandy Bridge and Super Micro is ready for the challenge and the opportunity.

Operator, at this time we are ready for questions.

(Operator Instructions). And we'll go first to Mark Kelleher with Dougherty & Company.

Great, thanks for taking the questions. I wanted to start with the hard disk drive shortage. What are you doing with your suppliers to secure that supply? Interested in what steps you're looking at and maybe the trade offs between buying a higher priced inventory and passing that along and do you thank that -- would that hard disk drive shortage in this quarter and the next quarter get in the way of the Romley launch? Is that going to limit what you can do with that Romley launch? Thanks.

Thank you for the question. Indeed we saw a completed system about four years ago, right? So our hard drive relationship with the suppliers is still new relatively compared with our tier one competitors. However, that relationship has been improving gradually, especially in last couple of months. So we do feel our situation in terms of hard driver support today is much better than December time frame. So we see that improvement and we will continue working on that.

So for Sandy Bridge launch I believe we will be in safe position.

Anything additional, Mr. Kelleher? And hearing no response, just as a reminder to the audience it is star one if you would like to ask a question. We'll move next to Glenn Hanus with Needham and Company.

Yes, good afternoon, guys. So you have guided a pretty wide range for revenues and EPS. Should I assume that the primary reason for the wide range is the drive situation and should I assume that you would be towards the upper end of that range if drives supply works out well for you, that that's more a reflection of the demand?

Yes indeed and the reason why we offer a big range because of hard drive [still] and other visible right but again that's why I just stated today we feel much better than December time frame.

So can you address the rest of my question?

Yes and Glenn, like I said, I think what we stated was the demand is strong and the backlog is strong so clearly, as Charles mentioned, we're building our relationships in the hard disk drives and we feel it's better but again the wider range is due to the hard disk drives.

Do you have a sense of sort of a time frame when you feel like it would more or less be maybe there's some impact this quarter? How do you feel about as you look out sort of towards the June quarter?

At this moment we feel the hard drive condition will be slightly better than December quarter and again, because a lot of unknown factors, we are not that sure. That's why I gave a larger range.

Okay I'll hold it to one question and circle back. Thank you.

(Operator Instructions). Dan Dolev, Morgan Stanley.

Just a quick question, can you please comment on server demand in the previous quarter and in the coming quarter, any trends that you're seeing or anything that you could shed some light on? Thank you.

Okay December quarter indeed we experienced very strong demand and that's why we have a big back order because of hard drive supply was [not sufficient] and that's why we did not ship that much. However, March quarter -- I mean this quarter -- because Sandy Bridge will be in full production so we see strong demand there and we believe this quarter will be at least slightly better than our December quarter.

Thank you very much.

Matt Nahorski, Stifel Nicolaus.

Just a quick question for you around the Internet data center vertical, could you talk about some of the trends that you're seeing there as well as how that bakes into your guidance going forward? I mean are you going to continue to see kind of lumpiness in the revenue stream there and just any comments around that would be helpful? Thanks.

Yes, Matt, this is Howard. Yes we do see lumpiness. It's a project based business so we do see lumpiness there. However, as indicated, the Sandy Bridge product is going to be a good product and so we've got a full line of Sandy Bridge products coming out that will take the benefits of that and that should be very appealing to the data center as well as all the other HEC clients that we have. So we see a pretty good demand, strong demand in that area.

Thanks.

(Operator Instructions). We'll take a follow-up question from Glenn Hanus with Needham & Company.

So just shifting to operating expenses for a minute, it sounds like on the G&A line you mentioned some moving expenses so I assume that's sort of non-recurring so would we expect lower G&A in the March and June quarters?

Yes, Glenn. Yes you're exactly right. We won't re incur some of those moving expenses. However, I do have some audit and tax fees that I will be paying so you won't see as much of a move as you saw in the previous quarter to quarter.

Okay but it will be lower sequentially in March?

No it will be slightly higher.

Slightly higher, okay. And then on the R&D side, this fourteen-ish level, should we think about that now that you've gotten over the hump on Romley that should be trending a little lower or flattish or how should we think about that over the next couple quarters?

Yes indeed we hired -- indeed 15% more engineering headcount in that two quarters. That's pretty much to meet Sandy Bridge demand but now in next two quarters we have pretty much enough engineering manpower now so we won't increase that much in near future.

Okay and then on the gross margin line could you comment a little bit on how we should think about gross margins in the next couple quarters, puts and takes there? It sounds like the drive situation actually benefited you in the December quarter if I heard you right, so could you talk about that?

For the next few quarters, yes the hard drive cost are maybe not that [sexy] but the Sandy Bridge product line, new products, good technology will help us a little bit.

Okay. All right thank you very much.

(Operator Instructions). Mark Kelleher, Dougherty & Company.

I just wanted to follow up with Glenn's question on gross margins. Can you talk about the Taiwan facility and how we should think about that coming on line and will that -- what effect will that have in the March quarter and then maybe further out, how that should ramp up?

Yes the Taiwan operation for sure cost ways is much lower than Bay area right, so eventually we'll be able to take that advantage. However, for March quarter because it's a new facility so it won't ramp up that fast. So I'd rather say that will financially us but not immediately.

Two quarters, June quarter help?

June may have more. September will have even more.

Okay thanks.

(Operator Instructions). 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 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 2012 conference call. We do appreciate your participation. You may disconnect at this time.