超微電腦 (SMCI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer Incorporated Third Quarter Fiscal 2012 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 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, April 24, 2012. A replay of the call will be accessible until midnight, May 8, by dialing 877-870-5176 and entering the conference ID 6746870. International callers should dial 858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President Investor Relations.

And now I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Good afternoon and thank you for attending Super Micro's conference call on financial results for the third quarter fiscal year 2012 which ended March 31, 2012.

Before we begin, I'd like to advise you of upcoming investor conferences at which Super Micro will be participating. On May 24, we will attend the Sterne Agee Technology 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 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 our other SEC filings. All 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.

Let me start by sharing the fact that we grew the Q3 revenue year over year by only 2.5%, mainly because of the Thailand flood that caused worldwide hard drive shortage which affected us badly (inaudible) into the quarter. In addition, the launch of the new Sandy Bridge (inaudible) platform coming just before the end of the quarter was [bad] to achieve meaningful revenue (inaudible) in the March quarter. Some customers anticipate that technology transition and decided to postpone acquisition until the new product launch. With this issue resolved and behind us now, we are in a very good position for strong growth for the next several quarters.

Please turn to slide four. Now let me provide you with the financial highlights of our third quarter. The third quarter revenue was $240.2 million, or 3.9% lower than last quarter, and 2.5% higher year over year. Non-GAAP net income was $8.8 million, or 21.1% lower quarter over quarter and 28.1% lower compared to last year.

Super Micro's non-GAAP earnings per share was $0.19 per diluted share compared to $0.25 last quarter or $0.28 last year.

From a geographic perspective, this quarter the United States accounts for 56.5% of revenue, Europe was 23% and Asia was 18.1%. Sequentially, all the regions were essentially flat from the prior quarter. On a year-over-year basis, the US was 2.9% higher while Asia was lower by 1.8%. Europe was basically flat with a year ago.

Last quarter, OEM and direct accounts -- and direct customers account for over 47.4% of revenue, and Internet data center was 15.7% of total revenue as a result of the strong OEM and direct business. Systems sales continued to be strong and reach a record high -- 48.5% of sales.

We had many successful deals in our complete rack systems solutions which enables customers to immediately (inaudible) their orders at (inaudible). Customers are very satisfied with the plug-and-play experience (inaudible) and the rack (inaudible) offered by Super Micro. Therefore, I expect this strong momentum of (inaudible) business to continue.

The coming June quarter performance is looking very positive, simply because, first, we have no hard drive shortage problem now. Second, the Sandy Bridge products are in high-volume production with strong customer demand. Three, we are more ready for complete data center and (inaudible) solutions, including fully-installed and tested rack solutions and software. And number four, more customers could take advantage of our new Asia integration and (inaudible) facilities.

These are just to start, and we will have more reasons for strong growth after the quarter (inaudible).

Now let me come in a little more on (inaudible) about our situation we (inaudible) last quarter. The hard drives was in shortage for almost the whole quarter due to the flood, especially in the first two months. Compared to Q1, Super Micro was impacted much more than that. We worked very hard this quarter to strengthen our relationships with key hard drive manufacturers, and we were successful in this effort. Long-term contracts were drawn and the result was that our allocation of hard drives vastly improved by the end of the quarter. We see that situation is now getting back to pre-Thailand flood conditions, and our hard drive shortage issue is basically [dissolved].

The launch of the Sandy Bridge processor, which came essentially at the end of our March quarter, did not contribute much to our Q3 revenue. As a result, we were unable to immediately offset our investment cost and our profitability was impacted. However, our early sampling program with most of our customers indicates that the demand for those processors in the future quarters will be very strong. In particular, at quarter-end we had one large prepared shipment postponed to Q4. If not for this (inaudible) delay last quarter, our performance could have been much stronger.

The success of our Sandy Bridge product launch is mainly due to our large investment in R&D. In the past 2 years, we add 63% more engineers to our R&D group. We have made this investment in engineering because we know the transition to a new process platform is the most critical time to maintain our time-to-market advantage and remain strong in technology innovations. In the short term, the investment made on our engineering team weighed heavily on our financial performance. However, in the future, (inaudible) to market, (inaudible) application optimized products will enable us to grow faster and to a new [level].

Now I would like to provide you with updates on our capacity expansion. Our introduction of a new line into Taiwan facilities remains on track, and we have three new lines fully operational. As we had said previously, the Taiwan facility will improve the logistical foundation of Super Micro, which will lead to a lower production and logistic cost, and it will allow us to grow more quickly in Asia, as well as in Europe. We plan that Taiwan facility will be (inaudible) by (inaudible) this calendar year, and we will continue to serve key Asia and European customers during this ramp phase. As for our current products, (inaudible) grew stronger year over year and started to continue to grow steady from last year. Rack solutions and GPU remain strong. Much interest and the sales result for our MicroCloud have been very good and we believe that MicroCloud is shaping up to be a strong product line. Our other new products, such as Networking [suites] and (inaudible) servers also continue to grow.

Looking ahead, the technology transition to Sandy Bridge has now officially begun and (inaudible) for growth over the next several quarters. We expect a server refresh cycle to create a stronger demand for increased performance and lower power consumption servers (inaudible) products. Our new (inaudible) Twin server storage product line is the most outstanding example which makes the server consume less energy power while helping customers to realize (inaudible) air cooling [data center] much easier. In addition, the [UP] Ivy bridge will launch this quarter and the 22-nanometer version or Sandy Bridge design will provide even greater performance (inaudible). Therefore, we are excited about our technology transition and, given our heavy investment in R&D, we are well-positioned with upgrade to product line to provide the market with the (inaudible) products.

Let me now update you with more detail on our new and leading technologies. We (inaudible) compared to our previous X8 generation. We will be providing an extensive line of optimized X9 Sandy Bridge solutions for different market segments. This system feature a new-generation, high-efficiency (inaudible) power supply that can reach 95% efficiency in typical applications and improve both light and heavy-loaded efficiency as well. We will also be pushing the boundary of green computing by offering products that operate in high temperature -- 47 degrees C. These solutions will make [free] air cooling become easier and have a customer achieving a PUE of 1.1 or even better.

Later this quarter, we will introduce the (inaudible) Twin (inaudible) as mentioned. We have (inaudible) for competitive leaders. This twin (inaudible) product line will combine factor performance, better performance per watt, higher storage capacity and higher flexibility that will make this product line the most competitive product in the data center market. We are very excited about this new product line which builds on the Twin innovation that we pioneered several years ago.

Our GPU-optimized product line in 1U, 2U, 4U and blade platform provide extreme performance in calculation of our (inaudible) intensive applications and have been the most popular GPU servers in the market. The new (inaudible) GPU solutions are designed to support our upcoming new-generation GPUs. Higher-capacity (inaudible) storage and more.

Our new workstation product line featuring new workstation enclosure with high efficiency, super-quiet power supply and high performance IO support, our new specialized server and workstation product line to support our (inaudible) optimized for HFT -- high-frequency trading applications (inaudible).

We have just released our new high-volume standalone switch product two weeks ago. We are also continuing to expand our offering of optimized 10G and (inaudible) solutions to our (inaudible) and their (inaudible) customers. Our switch products are in the leading position in performance and cost.

Super Micro data center (inaudible) will help us present total solutions to our customers. Our testing site at (inaudible) to (inaudible) and we have just begun to recognize the revenue on sales of this software. We believe this is only the beginning of our ability to provide the most hardware and software solutions to our customers. Our complete rack solutions have been successful deployed to many data centers now. With our increasing engineering expertise and extensive testing, the direct shipment of complete racks provides the customer (inaudible) the power and convenience and trouble-free experience. We are expecting faster growth of our complete rack solution business.

For more specifics on the second 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 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 supplement 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 $240.2 million, up 2.5% from the same quarter a year ago and down 3.9% sequentially. The increase in revenue from last year was primarily due to continuing ramp of new product platforms, as we have continued to expand during the past year, especially in our blade product line, as well as ramp for our full rack solutions. The sequential decrease in revenue from last quarter was primarily due to the seasonal weakness, a shortage in hard disk drives and the Sandy Bridge transition.

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

Turning to product mix, the proportion of revenues from server systems was 48.5%, which was an increase from 31.8% a year ago and from 44% last quarter. ASPs for the servers was $2,000 per unit, which is up from $1,400 last year and from $1,800 last quarter. We shipped approximately 57,000 servers in the third quarter and 1,212,000 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 15.7%, which was an increase from 9.7% in the prior quarter. Furthermore, 56.5% of our revenues came from the US and 52.6% from our distributors and resellers. Slide 10 and 11.

Non-GAAP gross profit was $40.9 million, up 7.5% from $38.1 million in the same quarter last year and down 4.4% from $42.8 million sequentially. On a percentage basis, gross margin was 17%, up from 16.2% a year ago and comparable to 17.1% sequentially.

Price changes from Ablecom resulted in no change to gross profit in the quarter, and total purchases represented approximately 20.1% of total cost-of-goods sold compared to 20.3% a year ago and 18.5% sequentially.

The year-over-year increase in gross margin resulted from increase in the sale of server solutions, which typically have higher margins.

Sequentially, gross margins were comparable. The increase in percentage of server revenues offset the higher margin from hard disk drive sales in the second quarter. Slide 12.

Operating expenses were $28.7 million, up from $20.8 million in the same quarter a year ago and up from $26.6 million sequentially. As a percentage of revenue, operating expenses was 11.9%, up from 8.9% last year and 10.6% sequentially. Operating expenses were higher on an absolute dollar basis year over year and sequentially. The year-over-year increase was primarily in R&D as we continue to invest in our product portfolio, especially in preparation for the Sandy Bridge launch which occurred on March 6.

Sequentially, we saw an increase of operating expenses of about $2.1 million, primarily due to R&D expense growing by about 900K related to salaries and benefits to support the new technology launches, such as (inaudible) Twin and software solutions; and $300,000 less in (inaudible) fees from our customers. In addition, general administrative expenses grew by about $400,000, primarily due to an increase in legal expense surrounding a patent (inaudible) case filed in the third quarter.

The Company's headcount increased by 58 sequentially to 1,453 total employees, primarily in R&D.

Operating profit was $12.2 million, or 5.1% of revenues, down by $5 million, or 29.3% from $17.2 million a year ago and down $4 million, or 24.9% from $16.2 million sequentially.

Net income was $8.8 million, or 3.7% of revenues, down $3.4 million or 28.1% from $12.3 million a year ago and down $2.4 million, or 21.1% from $11.2 million sequentially.

Our non-GAAP fully-diluted EPS was $0.19 per share, down $0.09 from $0.28 per share a year ago and $0.06 from $0.25 per share sequentially. The number of fully-diluted shares used in the third quarter was 45,500,000.

The tax rate for the third quarter on a non-GAAP basis was 26.6% compared to 28.3% a year ago and 30.5% sequentially. The decrease in tax rate from prior year was primarily due to R&D credit true-up. We expect the effective tax rate on a non-GAAP basis to be approximately 30% for the June quarter, which is higher than then 26% in the same quarter last year since we only have 6 months of R&D credit this fiscal year.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and long and short-term investments were $92.2 million, down $13.9 million from $106.1 million in the prior quarter and up $18.7 million from $73.5 million in the same quarter last year.

In the third quarter, free cash flow was a negative $21.3 million.

Slide 14. Accounts receivable increased by $20.9 million to $101 million with days sales outstanding was 35 days, an increase of 4 days from the prior quarter. The company has actively reduced the discounts it provides to customers for key (inaudible) shipments by about 75 basis points.

Inventories increased by $35.6 million to $228.9 million with days in inventories increasing by 12 days to 97 days. The increase in inventory was due in part to preparing for the seasonally strong quarter, the increase in demand following the Sandy Bridge launch, replenishing hard disk drive inventory levels which were reduced due to the flood, as well as products for a pending shipment for a large product which we did not ship in the third quarter but is expected to ship this quarter.

Accounts payable increased by $26.3 million to $142.2 million with the days payables outstanding increasing by 7 days to 60 days, primarily due to the increase in inventory as mentioned above.

Overall cash conversion cycle were 72 days, an increase of 9 days from 63 days in the prior quarter.

The overall ratios noted above are similar to the trend which we have coming into the March quarter which is seasonally soft, going into a seasonally strong June quarter. Some of this has been increased with the replenishment of hard disk drive inventory levels and a ramping of the Romley product line.

Now for a few comments on outlook. As indicated previously, during the third quarter, we saw strength in our customer base and have started ramping Sandy Bridge solutions. While we did have some delays caused by shortages in hard disk drives and transition of Sandy Bridge products, the situation has improved. As mentioned before, we have entered into long-term supply agreements with our hard disk drive suppliers and continue to ramp our production of Sandy Bridge products. So as we enter the June quarter, which is seasonally a strong quarter for the industry, we are ramping Sandy Bridge products that improve our supply agreements on our hard disk drives and continue to increase production in our Taiwan facility. As we enter this technology refresh cycle, we are strongly positioned from a product and operations perspective.

Therefore, the Company currently expects net sales for the quarter ending June 30, 2012 in the range of $280 million to $310 million which, at the midpoint, is about a 23% increase sequentially and a 13% increase from the prior year. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.27 to $0.32 for the quarter.

It is 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, Super Micro has spent the last many quarters preparing for the upcoming server refresh cycle based on Sandy Bridge. Our investment in R&D new system architectural data centers (inaudible), a global production and logistics facility positions us for a next strong growth cycle. We had -- here at Super Micro from the beginning to (inaudible) to market, to take advantage of technology transitions. Our engineering team has produced the strongest and the broadest product line than any competition.

Calendar year 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.

Alright. Thank you, sir. (OPERATOR INSTRUCTIONS.) And we'll take our first question from Mark Kelleher with Dougherty & Company.

Great. Good afternoon. Thanks for taking the question. You mentioned that the -- there were some customer order delays waiting for the new technology transition and you indicated there was some effect on revenue from the hard disk drive shortages. Can you kind of size those? Which one had more of an effect?

Hi, Mark. This is Howard. We (inaudible) one customer that -- a shipment that was delayed and so it was less than a 10% customer per se. So again, we're not disclosing too much about it for confidentiality reasons, but it was along that magnitude. The hard disk drive certainly did play also into some of the delays in shipment that we did have, and although not the magnitude of the December period of time, March was more so.

Alright. And on the gross margin side, the Taiwan opening -- the manufacturing -- did that have much of an effect either way in the quarter?

It had some. Obviously, we're not at full capacity there as of yet, so we have more expenses and are not recovering our investment as fast, but it is ramping for us.

But did it have much of an effect either way on gross margin?

It did have some on a negative basis.

Okay.

Yes.

Okay. And last question is on R&D. You did ramp that up a bit in the quarter. Is this a -- as a percentage of sales, is this a sustainable level that we should expect going forward?

Indeed, R&D (inaudible) in that many quarters. We had (inaudible) and that for sure had some impact to our financial report. However, most products have been finished development. So now, we just started ramp-up of (inaudible). So R&D basically won't much growth in terms of headcount. And investment (inaudible).

Okay. Great. Thanks.

Alright. Thank you very much. Now moving on, we'll go to Aaron Rakers with Stifel Nicolaus.

Yes. Thanks for taking a question. On the guidance, let's just use the midpoint as the basis of your guidance range. How are we thinking about the mix between systems and subsystems in the current quarter?

Looks like a completed system we are continuing to grow. Again, Sandy Bridge -- we like that system because everything is being pushed to a maximum -- best performance, best performance per watt -- and that's why (inaudible) is very beneficial to customer. So next year, customer (inaudible) it's a really optimized, desirable system (inaudible).

Let me ask a different way maybe. When we look at the last 5 years, I think you've grown that sequentially about 15%. However, last year, you grew that business sequentially in the fiscal fourth quarter about 40%. I'm just still trying to gage, underneath of that and given the implications for the gross margin, are we to assume a 40%+ sequential growth or something more normal seasonality? I would assume with the Romley cycle you're assuming something that's much higher than typical seasonality.

Yes. Right now, if you take the midpoint of the guidance, I think you'll see, as I mentioned, we'll probably have about 23% in revenue sequentially. And the server mix -- Charles alluded to -- again, we're hoping that that's going to increase as we go along. Obviously, Sandy Bridge is a tougher product to implement and so this is allowing our engineers really to show an integrated solution is the best thing for the customers from a quality perspective.

Especially now, we have a much stronger (inaudible) hard drive supply contracts and also memory [support]. (Inaudible) from original manufacturers.

Okay. So it sounds like you're assuming not much of a change in your mix of the business.

Yes.

Okay. Follow-up for me would be is that when we've seen -- and I know we've discussed in the past prior server cycles. Obviously, Nehalem came at kind of the depths of the downturn and you really didn't get the uplift from a pricing power perspective. I think you made the comment that you've taken some discounting off the table. Your ASPs continue to increase. Is it still fair for us to go back to the pre-Nehalem cycles and use that as the benchmark for gross margin potential upside or expansion as we think about the Romley cycle over the coming quarters? Or, put more succinctly, 150, 200-basis-point expansion in the gross margin -- is that a fair assumption as we work through this Romley cycle?

I think so, Aaron. Basically, we have our long-term model out there. We believe it's achievable, and that shows the 19-22% gross margin in the next year. So again, as we get into the cycle, as we fully utilize the Taiwan facility in the second half of this year and we see the ramp of the Romley products and the Sandy Bridge products -- those are all beneficial to us.

(Inaudible) available.

Okay. Final thing for me would be is on the internet data center vertical, I think last time it was this high I think there was somewhat of a large customer within that that drove that business. How are we thinking about the visibility in that now 16% of revenue -- and what looks to be somewhat lumpy over the last couple of quarters?

Looks like as a percentage with data center and (inaudible) application we'll continue to grow because, again, our product solutions -- computer racks with even American software -- they have been very attractive to [those customers] (inaudible).

Okay. Thanks, guys.

Thank you.

Alright. Thank you. Now moving on, we'll take a question from Rajesh Ghai with ThinkEquity.

Yes. Thanks. I wanted to delve deeper into, Howard, (inaudible) getting to long-term supply contracts with your hard disk drive suppliers. So if you look ahead at your guidance, do you -- are you confident that the entire guidance range -- you will not have any (inaudible) constraints in your fiscal fourth quarter?

Kind of before we did not have 4 more contracts in between. In about March -- early March -- finally we have a strong -- much stronger partnership, but that's why we signed a contract. So our supply should be much more stable and hopefully also stronger (inaudible).

So you should be able to deliver everything that you have in your guidance at this point in time? There's no (inaudible) constraints that could prevent you from hitting any part of the guidance -- the high end of the guidance.

Yes. Should be in much better position now.

Okay. And as far as the facilities are concerned -- the Taiwan and other facilities are concerned -- you talked about a Taiwan facility kind of reaching full capacity by the end of the calendar year '12. Is that right?

Yes. [Basically.] The reason why I (inaudible) is because the hard drive shortage in Asia and in Europe was also very strong.

How do you expect demand to ramp for you guys after the fiscal Q4 with Romley? Do you think there's going to be surge year-end -- end of year, or do you think demand should continue to ramp beyond that -- beyond the fiscal Q4, or do you think there might be regular seasonality that you typically see in your fiscal Q1?

I guess (inaudible) will continue for many quarters.

Romley should continue to ramp through the (inaudible) through the remainder of three quarters this calendar year?

At least, hopefully.

Okay. Thank you so much.

Thank you.

Alright. Thank you very much. Now we'll go to Glen Hanus with Needham.

Thanks. Just go back to your business model -- operating model for a second. You commented on the gross margin side. You think over the next year basically you can kind of get to your 19% or 20% target there and then I think your operating model is like 9% to 10% or so. What -- is there a timeframe you think you can get to that? And how do you view the sustainability now of -- if you can -- of maintaining an operating model up around 9% or, as we get into the next cycle out there, will we go back to something significantly below that? How should we think about that?

Yes, Glen. This is Howard. Like I said, one-year target is what we've set out there. We're holding to that basically from now. With regards to the levers to pull, I think we're -- as Charles mentioned earlier -- we're in a much better position with a variety of different products, technologies, operations perspectives to go off and really get to that operating model that we've discussed before over the next year. And I think after this cycle, again, we're very well-positioned and keep on doing the formula that we have here about putting out the best products, application-optimized, and then fine-tuning our operating model.

Okay. Can we talk about the high-performance computing sector a little bit? You break out the internet -- data centers is usually 10 and now this quarter was 15%. Can you talk about what are your other largest verticals? And specifically talk about the high-performance computing sector. Obviously, Mellanox had some really strong numbers tied to that sector, and is that a good growth area for you guys, especially over the rest of this calendar year?

Yes. HPC, for sure, is an area we focus on a lot, especially our managements all the way up -- (inaudible) getting available. (Inaudible) we just start to charge a couple customers (inaudible). So with computing solutions, not just how (inaudible) now from managements all the way up, and computer rack solutions. And our switch (inaudible) also (inaudible) in production. So all of those will help our HP market.

How would you -- maybe you could talk about what you view as like your top five verticals. I know you're not going to give numbers or something, but what -- you have your internet data center. Would HPC be in there and maybe comment on what are your top five verticals really from an end-user market perspective and how are they doing?

I can mention some, like data centers, HPC, embedded, IPC, and storage.

Okay. Thank you.

Thank you.

Alright. Thank you. (OPERATOR INSTRUCTIONS.) And next, moving on, we'll go to Alex Kurtz with Sterne Agee.

Yes. Thanks for taking the question, guys. So Howard, I just want to clarify one of Glen's questions here. Did you say you're going to hit 19% in the year? Did I hear that right or did I mishear that? For gross margin?

15 -- I guess it's 15 months. It's some time next summer.

So some time in fiscal -- either the end of '13, beginning of fiscal '14, you'll be hitting at the low end of that gross margin range?

That's correct.

Okay. So that implies a pretty significant ramp from here. And I guess that stems from the cycle that we're looking at here from Romley and then, on top of that, again, the Taiwanese build, right? And we should think about those being sort of equal contributors to that?

Yes. I think that's a fair statement, Alex. Again, the Taiwan facility -- we talked about the leverage we're going to get out of that facility as we fill that one up coming into the end of the year and then further expanding that as the demand grows for us. And then, as Charles mentioned, we're right at the beginning of this new technology refresh cycle with Sandy Bridge and we (inaudible) very good things there.

Right. Sorry. Sandy Bridge. So if I look back at the ASPs, Howard, on the component side this quarter, it took a pretty big dip sequentially like from 104 to 100 or so, if my math's right.

Sure.

Can you sort of take me through the pushes and the pulls there and exactly why -- was that HCD-related? What was sort of like the drivers of that ASP decline on the -- in the March quarter?

Yes. In the March quarter -- we don't -- on the component side of it, it's really -- don't use that as much because, again, it gets a mix of either cables or -- and then you've got chips (inaudible) or other things. So again, it's a real wide swing about what's in that bucket. So we really don't have -- track much on the ASPs on that side.

Okay. I guess from a modeling perspective, it does have in impact. But you also did see an increase sequentially on the server ASP?

Yes.

And I guess that was without a full quarter of -- you had some headwind on the HCD market and Sandy Bridge wasn't really out there. So what -- on the lower unit volume quarter-over-quarter, however, why was the ASPs up a little bit?

Yes. Again, selling more complete systems. We had to -- we did have some shortages with regards to our HCD so we tried to push those more toward our full-service systems. [Not] sell bare bones, so sell more fully-populated systems, and that's what leads to a higher ASP.

Okay. On a sequential basis?

That's correct.

Okay. Alright. Thanks, guys.

Alright. Thank you very much. We'll now go back to a follow-up from Aaron Rakers.

Yes. Thanks, guys. One point of clarification. You guys had made a comment about hard disk drives having some negative impact on the gross margin. Would you be willing to talk about what the headwind was as far as that 17% gross margin related to hard disk drives and do you expect that to lift as values (inaudible) LTA in place and availability becomes more adequate as we progress through the year?

Yes. For hard drive, now we have a much more desirable (inaudible), and also, our volumes will continue to grow (inaudible). All those will make our profit positive from a hard drive point of view.

But the hard disk drive did -- that situation is reflected in the 17% gross margin. There was a negative impact in your model because of that this quarter, correct?

That's correct, Aaron. If you think back on the December quarter, we still had some inventory that were acquired at a lower cost -- right? -- for hard disk drive. And as I stated in the December call, a majority of our margin increase was due to us selling -- basically getting a higher margin on those hard disk drives we already had in inventory. By the time December rolled around where we ate up all that inventory coming into this quarter, we didn't have that type of inventory and so we didn't have that margin benefit from a low-cost inventory.

And you weren't able to pass all the price increases through? Did you pass some (inaudible)?

It wasn't more of a passed increase, but more of -- remember, in December quarter, I had inventory that I acquired at a low cost before the flood happened. And so when the floods happened and the prices increases happened, we had lower-cost hard disk drives already in our inventory, right? So as I sold those out, I got higher margins on that during the December quarter. If you look into the March quarter, I didn't have that low-cost inventory to help my margins out this quarter.

And so what I'm asking, Howard -- sorry to beat around the bush here a little bit -- but what I'm asking is what was that headwind on that gross margin in the March quarter?

In the March quarter?

Yes.

Again, it was a majority so we had about a -- almost a -- I think it was about a 100-point-basis move in the December quarter. I stated then that it was a majority of that move in the December quarter and so we didn't have hardly any of that this quarter.

Okay.

Does that (inaudible)?

That helps me out a little bit. And then also, how are we modeling OpEx on a total basis going forward? And then also, how are we modeling beyond the June quarter of the tax rate? And then I'll stop.

Okay. With regards to the tax rate, let's take that one first because it's a little bit more unpredictable, I guess. Again, the R&D credit did expire in December and historically, they do -- they have historically re-initiated the R&D credit. This year -- what is it? -- a voting year, if you want to call it that -- election year. So again, a lot more decreased visibility with regard to what's going to happen. However, when it does happen, again, there's a catch-up in that quarter for the passage of the R&D credit. So we've guided this present quarter -- the June quarter here -- a for 30% non-GAAP tax rate. And I think, if you look back, we've been guiding around 30%, 31% over the past year.

Okay.

Okay?

And then OpEx at $28.7 million. Should I -- we continue to increase that in our model assumptions going forward?

I think we're going to continue to invest, although not at the rate, as Charles mentioned, or really not at the rate because we've just gone through the launch of the Sandy Bridge product, prepared many of our products for release, and so we're not going to go at the same rate that we had previously.

Okay. I'll take it offline. Thanks.

Okay.

(OPERATOR INSTRUCTIONS.) Alright. Great. And it appears that at this time we have no further questions. I'd like to turn the call back over to Mr. Liang for any additional or closing remarks.

Yes. Thank you for joining us today and we're looking forward to talking to you again at the end of this quarter. Thank you everyone. Have a great day.

Thank you. Ladies and gentlemen, this will conclude the Super Micro Third Quarter Fiscal Year 20112 Conference Call. We do appreciate your participation. You may disconnect at this time.