超微電腦 (SMCI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer, Incorporated Fourth Quarter and Full 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 accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

(Operator Instructions)

As a reminder, this call is being recorded Tuesday, August 7, 2012. A replay of the call will be accessible until midnight, August 21 by dialing 1-877-870-5176, and entering conference ID number 4481991. 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. 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 2012, which ended June 30, 2012. Before I begin, I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On August 28, we will attend the Midwest Ideas Conference in Chicago, and on September 12, we will attend the Think Equities 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 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 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, 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 fourth quarter. We are pleased that our fourth quarter revenue was $275.9 million, or 14.9% higher quarter-over-quarter, and 6% higher year-over-year. This result is a record high for Super Micro. Non-GAAP net income was $8.1 million or 7.9% lower quarter-over-quarter, and 37.5% lower compared to last year. Super Micro's non-GAAP earnings per share was $0.18 per diluted share compared to $0.19 last quarter or $0.29 last year.

Slide five, please. Let me start with our results last quarter, as well as our achievements and challenges in the last fiscal year. I will then provide some insight on our plans for the upcoming year. Last quarter, we achieved record high revenue that sum up to over $1 billion revenue for the fiscal year. We are especially pleased with the strong performance of our complete rack solutions, which have grown repeatedly over the last year at the most--at almost 300% growth quarter-over-quarter. This rack of solutions combined with our server system contributed to 44.6% of our total revenue last quarter. Furthermore, 46.6% of our business last quarter came from OEM and direct customers, and especially internet data centers, which were 15.2% of sales.

The (inaudible - accented) revenue in North America was 57.4% and stronger than last quarter, while Europe was 22.4% and Asia was 17.5%, slightly lower from last quarter. Despite the weak global economic conditions that had impacted the rate of our growth, our business has been able to grow overall. Our margins [stifled] last quarter mainly due to a drop in hard driver price, as well as some price drop also happened to our memory [thin] component. However, we believe that most of the impact to our margin occurred last quarter and supply and demand conditions are in the process of stabilizing.

For the full fiscal year, we are pleased with our top line performance, especially our global operation from Beijing [enhancements]. Regardless of a challenging period of a hard drive shortage, a later than expected economic transition, and a weaker global economy, last year we grew full year revenue by 7.6% year-over-year, which once again outgrew the rest of the IP market and indicated that we continue to take much share because of our strong bottom line and our time to market advantage.

Some key products other than rack solutions mentioned previously have experienced good growth as well. Highlighting our growth in storage solutions, and blade in particular, the storage solution business grew 75% year-over-year, which was a good result, considering the hard drive shortage. The SuperBlade products grew 30% year-over-year. We are also receiving great traction and quickly ramping up the MicroCloud solutions this year, as most of the customers are looking for a great scalable cloud solution for their business.

On our business operations, we have opened our Asia Science and Economics Park in Taiwan in January this year and it has been growing steadily. Our timeline for [CET] has now reached (inaudible) in production, operations, engineering, and the sales and administration. We (inaudible) [of stopping]. We are well positioned to both grow our business internationally and to follow the full operations here in the United States. And at this stage we are overcoming the challenges that come with global operations and [the larger stakes], which (inaudible) and underutilized capacity in the near term. However, we are continuing to build our capability and expect to see contributions to our profitability from Taiwan in the near future.

Last year, we grew our headcount about 19 with a significant portion of that growth for the Asia facility. Approximately half of our total headcount goes basically in our engineering as we further excel in hardware and developing software, maintaining our time to market advantage in the [race] and the launch of our Sandy Bridge product lines, as well as our (inaudible). The FatTwin required that we invest more in engineering resources last year.

We are excited about our upcoming fiscal year 2013 with the Sandy Bridge processor finally in production (inaudible) at the end of last year. We are still at the beginning of the upgrading cycle. Last quarter, we sold less than 10% on our Sandy Bridge base, DPX9 products. We will have a much more Sandy Bridge ramp ahead of us. Currently, all of our product lines have been updated and enhanced for the Sandy Bridge technology. As the server upgrade cycle ramps over the next several quarters, we are very well positioned with the best server solutions in the industry.

And last, turn to slide six. In addition, we had recently introduced our FatTwin architecture. We fully expect them to be our important growth factor in the coming years. Now, FatTwin is a highly optimized 4U twin architecture that is optimized for data centers, cloud infrastructure, Edge PC environment, and storage (inaudible) applications. The [13D] was the base of storage capacity with eight (inaudible) by inch external house (inaudible) hard drive, but one new space. It also delivers the highest performance per watt and highest performance per dollars.

Because of our superior architecture design that's (inaudible) and power requirement, many (inaudible), high efficiency model of design, (inaudible) digital power supply and (inaudible) our service and (inaudible). It allows free air cooling by supporting 130 watts GPU at a 47 degree C [MPN] environment and 135 watts CPU at a 35 degree C, which is unparalleled in the industry. We believe that FatTwin is a unique architecture in the industry that has the potential to be a game-changing product line for Super Micro for many years to come.

Other than the FatTwin, let me now update you with more details of our new and leading technologies. Slides seven and eight, please. Super Micro's X9 Sandy Bridge solutions for different market segments feature the new generation high efficiency [disco] power supply that can reach 95% efficiency in typical applications, combined with our battery backup power module, exclusive to Super Micro. Data centers can now eliminate the need for a traditional bucket UPS system while providing a mission critical availability optimized for (inaudible) in media capable GPU and upcoming Intel GM5, our GPU optimizer product line in 1U, 2U, 3U, and 4U and (inaudible) platforms provide (inaudible) performance in HPC calculation, medical, financial, and graphic intensive applications.

Our optimizer for operational user--our new work station product nine maximizes 35 and features super quiet power supply and high performance (inaudible). Our special design air cool subsystem, a turbo boost, and enterprise overclocking capability. We are also continuing to expand our offering of optimized 10G infiniband (inaudible) and FCOE solutions to our cloud and data center customers. Our [stretch] products are in leading position in performance and cost.

Super Micro's data center management software (inaudible) SDCM, SSM, and (inaudible) firmware update MFU utilities will help us present a total solution to our customers. Our tester slides had converted to floor users and we have just begun to recognize revenue on sales of those software. We believe this is only the beginning of our ability to provide both hardware and software solutions to our customers.

Our complete (inaudible) solutions have been successfully deployed to many data centers. With our increasing engineering expertise and extensive testing, the direct shipment of complete rack provided our customers (inaudible) and trouble free experience. We are expecting a faster growth of our complete rack solution business.

In summary, in fiscal year 2012, Super Micro again outgrew the industry during a challenging period. We are pleased that we have reached a milestone as a $1 billion company, and we are also pleased to report that for 19 years we have continued our trend of strong growth and profitability. As we enter fiscal 2013, we are positioned better than ever to grow rapidly with a strong global presence and production capacity, combined with our inter (inaudible) X9 platform, including server, networking, storage, and complete rack solutions. We are prepared not only to meet the customer demand from the IP upgrade cycle, but also to gain more market share from competitors.

For more specifics on the fourth 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 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 nine. Revenue was $275.9 million, up 6% from the same quarter a year ago, and up 14.9% sequentially. The increase in revenue from last year was primarily due to the growth in our server solutions business and the continuing ramp of our full rack solution and new product (inaudible), such as super--as [Micro Pop]. The sequential increase in revenue from last quarter was primarily due to the subsystems and accessories sale, primarily of hard disk drives and memory, as discussed previously, and the ramp of our full rack solution.

On a percentage basis, full rack solutions, MicroCloud, and storage were the fastest growing product lines from the prior quarter.

Slide 10. Turning to product mix, the portion of revenues from server systems was 44.6%, which was an increase from 40.4% a year ago and a decrease from 48.5% last quarter. ASPs for servers was $2,000 per unit, which is up from $1,800 per unit last year, and the same as $2,000 last quarter. We shipped approximately 62,000 servers in the fourth quarter and 1,167,000 subsystems and accessories. We continue to maintain a diverse revenue base with over 600 customers, with none of these customers representing more than 10% of our quarterly revenue.

Internet data center revenue was 15.2%, which was a decrease from 15.7% in the prior quarter. Furthermore, 57.4% of our revenues came from the U.S. and 53.4 from our distributors and resellers.

Slides 11 and 12. Non-GAAP gross profit was $42.6 million, up 5.4% from $40.5 million in the same quarter last year, and up 4.2% from $40.9 million sequentially. On a percentage basis, gross margin was 15.5%, the same as 15.5% a year ago, and down from 17% sequentially.

Price changes from Ablecom resulted in no change to gross profits in the quarter, and total purchases represented approximately 22.6% of total cost of goods sold, compared to 14.9% a year ago and 20% sequentially. The year-over-year gross margin was the same. Both quarters were impacted by challenging component pricing. Last year, from memory pricing due to the Japan earthquake and tsunami, and this year from hard disk drives and memories due to the Thailand flood and product transition.

As a result of these events, the Company has improved its relationship with its vendors and this should help the company in the future. Subsequently, sequentially gross margins decreased from last quarter, primarily due to hard disk drives and memory pricing mentioned above. Margins for other products were about the same as the prior quarter.

Slide 13. Operating expenses were $30.6 million, up from $22.7 million in the same quarter a year ago, and up from $28.7 million sequentially. As a percentage of revenue, operating expenses was 11.1%, up from 8.7% last year, and down from 11.9% 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 invested in our product portfolio for the Sandy Bridge launch, as well as FatTwin and other new product platforms. Sequentially, we saw an increase in operating expenses of about $1.9 million, primarily due to sales and marketing expenses of about $1.2 million associated with promotional expenses for new products and trade show expenses.

In addition, G&A expenses increased by about $452,000, primarily due to foreign exchange losses on sales.

The Company's headcount increased by 50, primarily in operations and in R&D, to 1,503 total employees.

Operating profit was $12 million, or 4.4% of revenue, down by $5.7 million, or 32.2% from the $17.7 million a year ago, and down $0.2 million, or 1.4%, from $12.2 million sequentially. Net income was $8.1 million, or 2.9% of revenue, down $4.9 million, or 37.5%, from 30--$13 million a year ago and down $0.7 million, or 7.9%, from $8.8 million sequentially. Our non-GAAP fully diluted EPS was $0.18 per share, down $0.11 from $0.29 per share a year ago, and down $0.01 from $0.19 per share sequentially. The number of fully diluted shares used in the fourth quarter was 45,548,000.

The tax rate in the fourth quarter on a non-GAAP basis was 31.6%, compared to 26% a year ago and 26.6% sequentially. The increase in the tax rate from the prior year was primarily due to timing of the R&D credits. We expect the effective tax rate on a non-GAAP basis to be approximately 34% for the September quarter, which is higher than the 33.1% in the same quarter last year, since the R&D credit has not been reinstated yet this year. If the R&D credit is reinstated retroactively, as has been done in the past, then there will be a catch up of the credit in the quarter this occurs.

Turning to the balance sheet on a sequential basis, slide 14. Cash and cash equivalents and short and long term investments were $83.8 million, down $8.4 million from $92.2 million in the prior quarter, and up $8.6 million, from $75.2 million in the same quarter last year. In the fourth quarter, free cash flow was a negative $5.5 million. The negative cash flow is primarily due to increase in inventory.

Slide 15. Accounts receivable increased by $1 million [for] $102 million, and DSOs was 34 days, a decrease of one day from the prior quarter. Inventories increased by $47.7 million to $276.6 million with days in inventory increasing by three days to 100 days. The increase in inventory was due in part to preparing for the increase in demand following the Sandy Bridge launch and replenishing of hard disk drive inventory levels.

Accounts payable increased by $31.8 million to $174 million, with the days payables outstanding increasing by two days to 62 days, primarily due to increasing inventory as mentioned above.

Overall cash conversion days were both 72 days for the fourth quarter and the prior quarter. The overall ratios noted above are higher than historically--historical due to the replenishing of hard disk drive inventory levels and the ramping of the Sandy Bridge product line.

Now for a few comments on outlook. As indicated previously, during the fourth quarter, we continued to grow our Sandy Bridge solutions in which we have a time to market advantage, our full rack solutions are ramping, and we have launched our FatTwin solution. We remain cautious about the global economic environment, but do see opportunities for growth around the world. Our Taiwan facility is still ramping and we continue to see operational efficiencies we can gain.

So as we enter the September quarter, which is seasonally a weak quarter for the industry, we expect to see continuing ramp of the Sandy Bridge product line, higher volumes of our FatTwin solution, as well as improvement in our operations overseas.

We enter fiscal year '13 in a strong position from a product and operating perspective to benefit from investments we have made over the past year. Therefore, the Company currently expects net sales for the quarter ending March--September 30, 2012 in the range of $270 million to $290 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.18 to $0.24 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 development, 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. While we are pleased that 2012 was another year of success and growth for Super Micro, we now look forward to a stronger fiscal 2013 with the Asia and EMEA facility ramping in production and the growth (inaudible) such as the new FatTwin architectures, the industry's product nine of Sandy Bridge products, storage, GPU solutions, complete rack solutions, data center software, stretch, and et cetera. We have never been better positioned to grow our business.

In summary, we believe our Company is positioned and (inaudible) deliver good results in 2013 and we expect these results to provide better profitability.

Operator, at this time we are ready for questions.

Thank you, sir. (Operator Instructions) We'll take our first question from Mark Kelleher with Dougherty and Company.

Okay, great. Thanks. Thanks for taking the question. I was wondering if--I know you guys talked a lot about the pricing effect, the component pricing on gross margins. Could you just talk a little bit more about the revenue shortfall to your initial guidance? Was there--what came in a little unusual? Was it just general economic weakness? Was it Europe? Was it a slower ramp in Sandy Bridge servers? Can you just talk about that a little bit?

Yes. Very good question. I guess the hard drive price drop and also the (inaudible) price drop, right, that kind of made us be conservative to gain some lower margin business. Right? That's one--another reason. And also, Sandy Bridge, this time the ramp (inaudible). So that kind of lowered our revenue in June quarter. However, the September quarter should be much better.

So is Europe having any effect? How's Europe exposure doing?

Europe was okay, Mark. It was down a bit, but obviously, we're still seeing a lot of opportunities over there.

And then, just as a follow up, the gross margin plan that you have, can you just talk a little bit about where that should trend? I know you've given in the past some longer term goals. Are you sticking to those goals?

Yes, we are. I mean, the opportunities for the Taiwan facility and the other things that we're doing still are out there. I think if I had to characterize this quarter, as Charles and I previously mentioned on the memory and hard disk drive issue, that was the majority of the shortfall between let's say the March quarter margin and the June margin.

Okay, thanks.

And we'll move next to Rajesh Ghai with ThinkEquity.

Hi. Thanks. Howard, memory pricing has kind of reached a bottom it looks like and is very likely to go up in the future, if one has to hazard a guess. What steps are you taking to ensure that this increase in memory pricing does not impact the gross margin going forward, and actually could take that to your advantage if it doesn't happen--if it does happen in that direction?

Yes. Indeed, in earlier kind of April-May timeframe, the industry expected (inaudible) module price will grow, and which (inaudible) assumption at that time. And that's why we saw (inaudible) ware. But now, I'd rather say that the worst of times should be passed already. So price for hard drive and thin module now more--much more stable now. So I believe it will become more (inaudible).

True. If memory pricing goes up in the future, like is likely to happen, can we expect gross margin stability, or could that be again a big headwind for you in the future?

I guess once the price is more stable, then it's better for us. But again, during the hard drive shortage timeframe we spent a lot of effort to enhance that relationship with our partner. So indeed, the whole company is in much better position than before.

Okay. And can you comment on the competitive landscape and pricing in North America, if that was any reason for the gross margin because we're hearing reports of the (inaudible) contract manufacturers getting more active in North America, maybe selling directly to some of your customers. Could you provide some color on that?

Yes, Rajesh. This is Howard. As I mentioned earlier, the gross margin move that you saw between the quarters was--I guess the majority of it was the hard disk drive memory pricing. Actually, the pricing or the margins for our other products was fairly stable between the quarters, so we didn't see that impact that you may be talking with--talking about.

So have you seen a comparative kind of change over the past one year compared to what you may have seen at--when the (inaudible) first occurred?

Well, certainly the Nehalem refresh was coming off the eve of that economic time that we were going through back in 2009. This time around it's not quite--the economy is still a concern out there, but certainly not at the same level it was back in 2009. So again, there's lots of good opportunities out there for us, even though you have that economy kind of backdrop. It's not as bad as it was back in 2009.

But no comparative concerns?

Well, I think back in 2009, I think there was a lot of shrinkage in the market at that point because of the tough economic conditions there that you saw - a very competitive market. And I don't think you see that as much this time around.

Okay, thank you.

We'll move next to Glenn Hanus with Needham and Company.

Yes. Good afternoon, guys. So to make sure I understood the answer to the first question there about the roughly $20 million in shortfall in the quarter, did you say that the Sandy Bridge rollout was a little slower generally than anticipated? Was that the majority--the reason--the primary reason for the revenue shortfall?

That--yes, one of the main reasons, other than the hard drive price drop and (inaudible) price drop that (inaudible) gave us more pressure to gain the best margin deal.

I'm sorry. What does the drive issue have to do with the revenue shortfall?

I mean, when the drive price dropped, our margin from hard drive from memory became much lower. That's why we had that--we had a big reduction to our purchases, our low margin (inaudible).

Okay. And just kind of geographically, can you talk about Europe versus America versus Asia, the--kind of the current demand environment, what you saw in the quarter, and the current demand environment by geography?

In USA, our market share--our kind of revenue share continues to be strong. In Europe, we start to be very aggressive for gross sales and marketing team in that six months--so with the higher minimal sales and marketing guide in Europe. Essentially, in Asia. So we believe mostly in Europe and Asia our revenues will grow strongly in 2013.

I didn't quite understand the comment. I thought I heard in the narrative underutilized capacity. What was that?

In Taiwan we have a big facility, the production capacity almost as big as our facility in USA. However, the shipping from Taiwan is still really small. That's why we did not--we don't utilize the capacity in Taiwan. And that's where economies of scale have been still very weak in Taiwan. We need to ramp up higher volume.

And on the model goals of roughly 19% gross margin, 9% operating margin, I think you used to say the goal was like the second half of fiscal '13. Has that pushed out at all as your goal, just given the economic challenges, or do you think that's still a realistic timeframe?

I guess we had to push out a little bit, maybe not too much, but again push out a quarter, for example.

Okay. And last--sorry, were you going to comment, Howard?

No, Glenn. I think I mentioned earlier, the levers are still there. I think we have to address the economic challenges, but I think the levers are still there, as we talked about before.

Okay. And lastly for me, operating expenses have been running a little higher than we had modeled recently. Can you talk about what happened to make you feel like you wanted to ramp up some expenses more--it sounds like more on the sales and marketing side, but also a little bit in R&D, and how we should think about that going forward?

I guess--let me start first. I mean, I guess because our challenge of strong competition, that's why we have spent more effort in technology. For example, FatTwin, it's become a really big strong product. We invested a lot on this brand new architecture and that creates more expense for sure for the June quarter. The other area is because we start to emphasize a lot in Europe and Asia. And that's why we had to spend more money in promotion, especially Europe and Asia.

Okay, thank you.

(Operator Instructions) And we'll move next to Aaron Rakers with Stifel Nicolaus.

Yes. Thanks, guys. Can you hear me?

Yes, we can, Aaron.

Okay, perfect. So a couple questions, if I can, as well. And I apologize if some of these were asked already. But the Romley cycle or Sandy Bridge cycle for you guys, can you give us any color of where we're at in that cycle? Are we--for you guys, is 20% of your shipments on those new platforms? How do we think about the progression? And where I ultimately want to go is how do we think about that in the context of what looks to be a relatively stable ASP trend on a sequential basis with last quarter?

Yes, with new products available for sure we have a better ASP and better margins. However, this time kind of Sandy Bridge because of more technical challenge, and also we tried to provide--indeed, we provided a brand new architecture, Fat Twin. All of those made the come to market a little bit better. But the partner however became much stronger and we expect those ramp ups to be coming very strong in September quarter and December quarter.

Okay. So I'm clear, so on a like to like basis, Romley is neutral to the margin--gross margin right now relative to the Nehalem platforms additive or--I'm just a little bit confused by that.

Yes. Aaron, this is Howard. I think Charles mentioned earlier in his presentation, too, the revenues are still less than 10% of our overall--.

--Okay--.

--Revenue.

Yes.

So we're still at the beginning--very beginning of the ramp as we are. And it is additive to our gross margins.

Okay. And then, the follow up question for me, I believe in your 10-Q you guys disclosed $276 million of a hard disk drive purchase commitment that carried through I think it was March of 2014. I guess I want to go back to the hard disk drive discussion, understanding that, and seeing what's happening in the pricing environment. I guess is that to be a lingering overhang over the next couple of quarters given how that LTA, if you will, kind of plays itself out, or is that something that you can--that basically lifts here over the coming quarters? Just trying to understand how that LTA kind of flows through your model, that $276 million number that you guys disclosed.

Yes. Aaron, this is Howard. Like I said, the LTA model, again, it doesn't cover 100% of our demand, so there is some buffer out there for us. We do take shipments every quarter based upon it, and we do work on pricing with our vendors every quarter on it. So it is adjusted every quarter with us. We do work with them and it is built in. And I think it is a good thing for the long term for us. I mean, we have some growing pains with it, but we view--I think it is a good thing because, as Charles mentioned, we're building our relationships with these guys, increasing our importance, so they'll all support us as we grow our scale going forward.

Okay. That's it. Thank you.

And we'll move next to Andrew Storm with Cortina.

Hey, guys. Thank you. I just wanted to make sure I understood a couple of things. On the OpEx expenses you talked about, you said you were running higher promotions, and then you also said you had spent more on R&D for the FatTwin. Is any of that one-time spending for R&D with the materials and that's going to come out next quarter--or promotions, or should we think about this new OpEx level as the base rate going forward?

Yes. For FatTwin, it is pretty much one-time.

And so, how much was that?

I believe we already spent maybe $7 million to $8 million in the extra money to build the strong (inaudible). So in the next few quarters, we will continue to make FatTwin product line stronger. But relatively, the investment will be much smaller.

So there should be $2 million in R&D coming out next quarter?

Next few quarters, yes.

Okay. And then, also, for promotions.

Promotion, I believe we've already done a lot. So next few quarters should be much less.

Okay. So you said that sales margin was up $1.2 million, so that should come down some by let's say $500,000 or closer to $1 million?

Yes. We had a trade show out there, so again, it will be--it will come down from the trade show perspective. But we've got other things that will offset some of that, like salary increases on an annual basis. And--.

--Okay--.

--If you look back--probably back of last year, you'll see a similar type of growth, although maybe not as high in our Op expenses due to the salary adjustments.

Okay. That's helpful. And then, on gross margins, going to Aaron's point, is--should we start to see with the hard disk drive--is this more of a one quarter issue, or does the LTA make it that this is a kind of long issue that slowly gets better?

I would just say for hard drive impact with the quarter should be March quarter and June quarter. And then, we are getting in better position now.

Right, I understand. But since hard disk drive pricing has gone down and you've entered into a long term purchasing agreement, you were--you didn't fully answer me. You said that you guys work with your suppliers on pricing, but should that pricing that you get come down in this quarter to be commensurate with the market or will it continue to be a drag?

Yes. Indeed, our price--we have agreed with our vendors (inaudible) or below. So we should be able to kind of properly adjust [them in].

Okay. So there shouldn't be a gross margin surprise next quarter?

Yes, it should be much better than June at least.

Okay, that's helpful. And then, just to make sure I understood on--you said you basically walked away from some lower margin business because of the hard disk drive issue this quarter. Is that right?

Yes, a little bit.

Okay. And were there any large deals that might have flipped or pushed out?

Yes. There was one deal that we'd been working on that we had that we thought we were going to recognize this quarter that had slipped out.

Okay, good. Thanks. Okay, great. And just the last thing I would ask is with the Romley cycle, you have 10% now. So when does that really pick up? I mean, is it something we should be talking about for you guys three to six months out? I mean, when does it really start to dominate the financials?

(Inaudible) you have plenty within the next six months for sure.

Okay, great. Thank you.

Thank you.

And it appears at this time we have no further questions in our queue. I'd 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 2012 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.