超微電腦 (SMCI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated first quarter fiscal 2013 conference call.

The Company's news release issued earlier today is available from its website at www.supermicro.com. In addition, during today's call the Company will refer to a slide presentation that it has made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

During the Company's presentation, all participants will be in a listen-only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question and answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded Tuesday, October 23rd, 2012. A replay of the call will be accessible until midnight November 6th by dialing 1-877-870-5176 and entering conference ID number 8555814. International callers should dial 1-858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President, Investor Relations. And now I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Good afternoon and thank you for attending Super Micro's conference call on financial results for the first quarter fiscal year 2013, which ended September 30th, 2012.

Before I begin, I'd like to advise you of upcoming investor conferences at which Super Micro will be participating. On November 13th, we will present at Wunderlich's conference at the Supercomputing Show in Salt Lake City. And on November 15th, we will attend the Southwest Ideas Conference in Dallas, where we will present and participate in one-on-one meetings.

By now you should have received a copy of today's new 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 2012, 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 first quarter. Our first quarter revenue was $270.7 million, which is 9.2% higher year-over-year and 1.9% lower quarter-over-quarter. Non-GAAP net income was $3.1 million, or 62.4% lower quarter-over-quarter and 70.9% lower compared to last year.

Super Micro's non-GAAP earnings per share was $0.07 per diluted share compared to $0.18 last quarter or $0.24 last year.

Slide five, please? We are pleased that the revenue for the quarter was up 7.2% from last year and down only slightly from our record last quarter, despite the challenges from a weaker global economy. The demand environment was slower as customers were more cautious about IT spending. While there are IT projects in the prelim stage, customers are delaying purchasing decisions until they have better visibility into the direction of macro economy.

Given this environment, our performance this quarter indicates that our fundamental business model of offering the most innovative application optimized servers and storage solutions remains popular in the market. More importantly, it allows us to continue to grow market share.

Last quarter the margins were mainly affected by the significant drop in components pricing of hard disc drive and memory. With the slow economy and the supply imbalance, price fell as the market looked to unload excess inventory at a lower cost, although we delivered near record high quantity of hard drive and memory bundles with our system solutions.

They are the key factors that negatively impact our net profits. We are focusing manpower on improving management of both our inventory as well as the component supply to react better to market conditions.

Let's review our revenue distribution of our business first for last quarter. Our Service System contributed 39.5%, while 45.3% of our business last quarter came from OEMs and direct customers, of which Internet Data Center was 8.8% of sales.

Geographically, revenue in North America was 49.8%. Europe was 23.4%. And Asia was 23.9%, which was a record high and a 65% growth from the same quarter last year. Our Asia facility had a healthy bump in productivity, reflecting the much higher sales in Asia last quarter.

Whenever it is appropriate from a logistic and service perspective, we will leverage as much resource as we can from our Asia facility. Given the global economic conditions, our Asia facility will become even more important in our goal to improve our operational efficiency and cost.

Last quarter Sandy Bridge sales represent 44% of all Intel-based processors, up 84% from the previous quarter, although the ramp of our Sandy Bridge-based solution is slower than we anticipated, due in large part to the hold up in the broader economy.

Innovative products such as our GPU products and MicroCloud are moving at a great pace. That means customers continue to look for great technology to go with the new processors. We do expect that, in longer term, the market will respond and buy into the benefits of the new platform's performance and energy saving advantages.

As I have mentioned briefly, our GPU solutions and MicroCloud are the top performers of last quarter, especially for GPU. Super Micro continues to have the most comprehensive GPU product line in the industry. Our data center update includes the Kepler K10 GPU support.

These single precision calculation optimized solutions are ideal for application in medical, seismic, oil and gas, military, and media fields. The upcoming K20 and GL5 solutions will further extend our leadership in scientific and other HPC computing.

Last but most importantly, our FatTwin product line began formal production successfully at the very end of the September quarter, and the demand has been growing strongly. Recently in a head-to-head industry standard benchmark test, Core LINPAC, our FatTwin outperformed leading competitors' twin systems in power savings by 16%.

This level of power savings and performance will make the FatTwin a strong choice among data centers, cloud infrastructure, HPC environments, and Hadoop applications in the coming quarters and years.

Let me now update you with more details on our new and leading technologies. Slides six and seven, please? The recently launched FatTwin marks a big new milestone in our five year old Twin architecture. It improves system power savings up to 16% when compared with other similar platforms of major competitors.

The 4U FatTwin architecture is available in high density, supporting eight, four, or two hot hardware system node configurations with a choice of memory capacity, hard disc drive type, and density up to 3 GPU per 1 U, AC, PC, or battery backup power modules, front or rear I/O networking options, and more.

Its high efficiency, highly effective shared cooling and power supply architecture allow the FatTwin to operate in high ambient temperature and free air cooling environments up to 47 degrees C, providing huge energy savings and improved TCO, total cost of ownership.

Our GPU optimized product line in 1U, 2U, 3U, 4U, and blade platforms provide extreme performance in calculation or graphic intensive applications, and they have been the most optimized and popular GPU solution in the market. The new X9 generation GPU solutions are designed to support a coming new generation GPU, including NVIDIA's Kepler K10, K20, and Intel's Xeon-Phi.

Our new Workstation product line features a new Workstation in [inaudible] with high efficiency, super quiet power supply, high performance I/O support, special design air cooling subsystem, and Turbo Boost with optional overclocking capability called hyper speed. These new specialized Server and Workstation product lines support high power, up to 150 watts GM CPU, and is optimized for HFT, high frequency trading, high performance EDA, and OEO and Gauss applications.

Our PBP, or battery backup power module, supports a brand new data center power supply design concept in modern data centers. It can be used to replace traditional expensive and inefficient UPS in a way of putting high efficiency UPS into each system in [inaudible]. It is an unconventional and yet higher efficiency way of protecting data and investments.

Super Micro data center management software, SDCM, was included in [inaudible] and software updates and monitoring utility have been serving several large corporate data centers. This software's features and support capability have been helped by sales of our hardware as the solutions to these direct accounts. They have also been supporting our channel partners to be more competitive by providing a complete system management software to their customers.

Finally, our complete rack solution includes a high performance, high density server, high capacity storage, high performance switch, and our data center management software, all designed and supplied by Super Micro.

We recently expanded our solutions by introducing the Hadoop Super Rack solution for cloud computing and the GPU Super Rack solution for HPC customers. They are extremely cost effective, flexible to scale, and among the hottest choice for many enterprise customers. We are expecting the continual growth of our complete rack solution business.

In summary, in the first quarter Super Micro achieved healthy sales and gained much share during a weak economic period. Although our margins suffered due to the steep decline in pricing for hard disc drive and memory last quarter, we are working to improve that situation with a strong focus on refining management of our components business in terms of inventory and cost.

We believe that we can return to stronger profitability as our management of components improves and market stability is reached. For more specifics on the first quarter, let me turn it over to Howard.

Thank you, Charles, and good afternoon, everyone.

I will focus my remarks on earnings, gross margins, operating expenses, and similar items on a non-GAAP basis, which reflect adjustments to exclude stock compensation expense. Reconciliation of GAAP to non-GAAP is included in the financial statements of the Company in today's earnings release and in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with a review of the first quarter's income statement. Please turn to slide number eight. Revenue was $270.7 million, up 9.2% from the same quarter a year ago and down 1.9% sequentially.

The increase in revenues from last year was primarily due to Subsystems and Accessories, as well as the ramp of the Sandy Bridge Solutions. The sequential decrease in revenue from last quarter was primarily due to seasonal weakness in the industry, concerns about the economy, and the transition to Sandy Bridge at the end of the quarter.

On a percentage basis, MicroCloud and GPU were the fastest growing product lines from the prior quarter. We also saw a good ramp in Sandy Bridge products, with an increase of 84% sequentially of Intel-based revenue.

Turning to product mix, the proportion of revenues from Service Systems was 39.5% of total revenues, which was comparable to the same quarter a year ago and a decrease from 44.6% last quarter. ASPs for servers was $2,000 per unit, which is up from $1,700 last year and the same as $2,000 last quarter.

We shipped approximately 55,000 servers in the first quarter and 1,036,000 Subsystems and Accessories. The decrease in server units resulted in part from some of our data center customers delay in transitioning to Sandy Bridge Solutions.

We continue to maintain a diverse revenue base with over 600 customers, and none of these customers representing more than 10% of our quarterly revenues. Internet Data Center revenue was 8.8%, which was a decrease from 15.2% in the prior quarter. Furthermore, 49.8% of our revenues came from the US, and 54.7% from our distributors and resellers.

During the quarter, we saw strength in Asia, which was -- offset some weakness in the US while Europe remained about the same on a percentage basis. As we ramp our Taoyuan facility and leverage its cost benefits, we are confident that we can continue to expand our presence in Asia.

Slide 10 and 11. Non-GAAP gross profit was $35.3 million, down 11.5% from $39.8 million in the same quarter last year and down 17.3% from $42.6 million sequentially. On a percentage basis, gross margin was 13%, down from 16.1% a year ago and from 15.5% sequentially.

Price changes from Ablecon resulted in no change to gross profit in the quarter, with total purchases representing approximately 20.9% of total cost of goods sold compared to 18% a year ago and 22.6% sequentially. The year-over-year decrease in gross margins resulted from price changes in hard disc drives and memory in the current quarter when compared to the prior year.

September 2011 was right before the October flood in Thailand which caused the volatility in pricing and supply of hard disc drives over the past year. Sequentially, gross margin was down and was entirely due to the pricing of hard disc drives and memory. Over 2% of the margin decrease was attributable to hard disc drive and memory pricing.

The suppliers reducing costs to acquire hard disc drives and memory, which require the cost-down of inventory, as well as customers reducing their prices to sell their inventory when there is an oversupply of these components, put pressure on margins.

This month the hard disc drives and memory margins have stabilized and industry reports indicate that vendors are taking actions to stabilize pricing supply. But, it is early in the quarter and we have tempered our forecast. Our product -- our other product margins during the quarter were stable or increased.

Slide 12. Operating expenses were $30.7 million, up from $24 million in the same quarter a year ago and comparable to $30.6 million sequentially. As a percentage of revenue, operating expense was 11.3%, up from 9.7% a year ago and 11.1% sequentially.

Operating expenses was higher on an absolute dollar basis year-over-year. We saw year-over-year increases in absolute dollars primarily in R&D as we invested in headcount to drive our innovation in our product portfolio, especially in preparation for Romley and FatTwin launches.

Sequentially, operating expenses were about the same. Annual salary increases were offset by reductions in development expenses associated with the launch of Sandy Bridge and our FatTwin last quarter. Marketing and sales expenses were higher due to write-offs of marketing materials of about $590,000.

General and administrative expenses were lower due to lower audit and tax expenses associated with our fiscal year-end audit in the prior quarter.

The Company's headcount increased by 24 sequentially to 1,527 total employees.

Operating profit was $4.6 million, or 1.7% of revenues, down from $11.3 million, or $15.8 million a year ago and down $7.4 million from $12 million sequentially.

Net income was $3.1 million, or 1.1% of revenues, down $7.4 million from $10.5 million a year ago and down $5.1 million from $8.1 million sequentially.

Our non-GAAP fully diluted EPS was $0.07 per share, down from $0.24 a share a year ago and down from $0.18 per share sequentially. The number of fully diluted shares used in the first quarter was 44,638,000.

The tax rate in the first quarter on a non-GAAP basis was 31.3% compared to 33.1% a year ago and 31.6% sequentially. We expect the effective tax rate on a non-GAAP basis to be approximately 32% for the December quarter, which is comparable to the 30.5% 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 $61.3 million, down from $83.3 million in the prior quarter and from $96 million in the same quarter last year.

In the first quarter, free cash flow was a negative $27.5 million. The net change in cash was negative $22.5 million for the quarter due to the payment of accounts payable associated with the prior increase in inventory.

Slide 14. Accounts receivable increased by $10.8 million to $112.8 million. And DSOs was 37 days, an increase of three days from the prior quarter.

Inventories decreased by $13.4 million to $263.2 million with days in inventories increasing by five days to 105 days. The decrease in inventory was due in part to a reduction of our HDD, hard disc drive, inventory.

Accounts payable decreased by $39.9 million to $140.1 million with the days payables outstanding decreasing by one day to 61 days, primarily due to the timing of payments to vendors. Overall, cash conversion cycle days were 81 days, an increase of nine days from 72 days in the prior quarter.

Now for a few comments on outlook. As indicated previously, during the first quarter we continue to see the ramp in our Sandy Bridge product line as well as very good interest in our FatTwin products. Asia continues to remain strong for us, and we continue to ramp our Taiwan facility.

In addition, HDD and memories have stabilized a bit, but there may be some pressure on our margins should this not continue to hold.

December is typically a seasonally strong quarter for the industry. However, we have tempered our guidance based on the slowness at the end of last quarter and the general weakness in the economy.

Therefore, the Company currently expects net sales for the quarter ending December 31st, 2012 in a range of $270 million to $295 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.12 to $0.16 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 back to Charles for some closing remarks.

Thank you, Howard. Super Micro is committed to continue its growth path even during the economically slow period. Our competitive position with the industry's best products, especially with FatTwin architecture, have never been better.

Our Asia facility will continue to be utilized at a greater degree to serve our Asian and European customers while improving our competitiveness in pricing. We are also committed to increase our profitability through better and more comprehensive customer and technical service, software solutions, and components management.

Operator, at this time we are ready for questions.

Thank you, sir. (Operator instructions.) Aaron Rakers with Stifel Nicolaus.

Thanks for taking the questions. Howard, I want to understand a little bit better the discussion on the hard disc drive impact as well as memory impact on the gross margin. Correct me, I think you said two thirds of the gross margin delta in the quarter was attributable to this. Is that correct and therefore equating to about 165 basis points, or is your guidance assuming, with the pricing stabilizing, that that comes back into the model? How are you thinking about gross margin in that context in this current quarter?

Hi, Aaron. Yes, I said in the call that basically of the -- you saw the decrease in margin of about 2.5% between quarters from 15.5% to about 13%. I said about 2% of that, or over 2% of that, was attributable to the hard disc drives and memory. So, not two thirds, but 2%.

Two percentage points?

Yes.

Okay. And your assumption that -- therefore are you implying that your gross margin this quarter, given that that's stabilized, now that you've been able to possibly readjust those -- the pricing with your suppliers, that you're assuming that we get back to a 15% level in the current quarter?

I have not made -- I've said that our current month looks stable right now. So, it looks stable, however it's really early in the quarter, Aaron, so we've tempered our forecast with some of that. Because, again, if price decreases happen again, again we're still susceptible to that in our inventories. If prices maintain stable, we're going to be okay. And then, if prices go up, we may see some benefit.

So, again, it's very early in the quarter. We're seeing stability right now, but, again, it's very early in the quarter.

Yes, I hate to come back to it, but stable in your model would -- stable would mean that that gross margin impact last quarter comes back to you?

In a way, yes. But, again, we've tempered it in our forecast.

Okay. And then, the follow up question, just remind us again your situation as far as the hard disc drive supply agreement. Where does that stand? I think last quarter is was $223 million. Where does that stand currently? And maybe you can give us some color on how we should think about that in the context of pricing with those suppliers.

Yes. Right now at the end of the quarter, it stands at about $180 million. And it's a two year agreement. It runs through March of 2014.

And that has some pricing negotiation to it?

Yes, it does.

Okay. Thank you.

Mark Kelleher with Dougherty & Company.

Okay, great. Thanks for taking the question. I'm just going to continue right on with that line of thought there. If we take the 2% and put it back, and let's say we didn't have the hard disc drive problem, we'd still be down about 200 basis points from last year. And we had Romley ramping up. We had much better utilization of the Taiwan manufacturing facility. I would imagine those two things would be helping.

So, I'm just trying to figure out where the steady state gross margin number should be. I mean, are we now looking at 15%, 16% as the number? And can you still get back to the high teens where you thought you could get maybe six months ago?

Yes, let me take -- Mark, so if we go back to prior to, let's say, all of this hard disc drive and memory stuff happening probably about three quarters ago, you'll see that we were probably about 16% or 17% as far as the gross margin's concerned.

And so, in the prior quarter, the June quarter, we said that, of that 1.5% decline, the majority of that was caused by the hard disc drives and memory. And then, this quarter I've said that over 2% basically has been caused by the hard disc drive and memory.

So, you'll see a total of around -- approximately at least 3% caused by hard disc drives and memory over the last couple of quarters, right? As we work our way through the agreements and improve our vendor relationships and -- we're hopeful that we can get that back so that, again, we can get back to that place where we started off about six months ago, nine months ago, back to the 16% to 17%.

And then, you're right. We do have the other things that should be adding to our gross margin, which is the Romley launch coming onboard and us increasing our Taiwan facility utilization, and then also obviously increasing our product mix with servers and software and support services.

So, those things are still working and they're still -- they're going on. I think we just need to work our way through the hard disc drives and memory.

So, there's really 3.5 points that could come back in a stable pricing environment, plus if the --.

Over time, yes.

Plus the shift back to Romley if the products -- back to not necessarily Romley, but to servers. A shift back to servers should help that gross margin as well.

Yes. Certainly that's the impact that we saw coming back from that steady -- let's say that state about six months ago.

Is there any thought of having to take a write-down to that inventory?

We have taken -- we've taken our lower cost to our markets to some extent during prior period, okay? So, we have taken that as the market prices dropped and the cost is taken. So, we have taken some of those write-downs already.

Okay. That's it. Thanks.

Alex Kurtz with Sterne Agee.

Hi. This is Amelia in for Alex today. Thanks for taking the question. Basically, give the volatility in your business model, wouldn't it make sense at this point to acquire some system level management software or virtualization software that could potentially add a little buffer to your business model and save you from having to aggressively cut OpEx when you experience maybe a less than favorable quarter?

Yes, indeed we are aggressively improving our system management software including certain remote management, some virtualization, and some storage related tools, including Switch, right, high performance Switch product line. So, we are doing those projects now.

And when do (multiple speakers)? I'm sorry.

And not acquiring other company. We still prefer growing organically with our own engineering team.

Okay. And when do you expect to maybe see an impact from that?

The impact has been gradually happening since about two quarters ago. So, it won't happen kind of overnight, but gradually improving. For example, today we have more than a handful of customers now pretty -- appreciate our software help. And this number will grow consistently.

Michael Bertz with Kennedy Capital.

Good afternoon, gentlemen. Just to kind of go back to the gross margin question again, and Howard, maybe you can walk me through a little bit on this and how much the timing impact you have, particularly from hard drive and memory, and I think mainly from hard drive, and in essence what is the difference between basically passing through the cost, if you're selling it as a component or something, and just how much you guys are having to eat over these different quarters where pricing is moving around on you.

I mean, I understand it's volatile, but 350 bps is a significant amount. And are you buying it in a previous quarter and then having to remarket? You talked about taking some write-downs just because you're marking it to lower cost of market. I mean, how much is that impacting you? And I am assuming most of this is coming in the subsystem business. Is that right, not in the system business itself?

Well, actually it comes in both sides of it, Mike, to the extent that we incorporate the hard disc drives into -- and the memory into our server systems. So, any type of price changes in their impact the overall server margin also. So, it is not just isolated in the components, the subsystem business. I'm talking about (multiple speakers). I'm sorry.

So, let's go back to the timing question, then. So, what's the cycle time basically? I know I obviously can tell what your days of inventory is, but what's the cycle time from when you actually buy it to when you actually turn it and put it in a system and sell it? I mean, how quickly can that happen internally versus how quickly the price changes externally?

Well, the price changes have been happening fairly quickly recently. I mean, I think in this present quarter, we actually saw again some strength.

And then, at the end of the quarter, we saw a pretty steep drop in the pricing happen where say -- I think as some customers were basically trying to get rid of some of their inventory, we saw some pricing pressure at the end of the quarter. So, again, it timing wise can happen fairly quickly, obviously quicker than when we can turn the inventory.

Okay. Well, then again, not to beat a dead horse here, Howard, but how quickly can you turn the inventory through your systems? I mean, what -- again, from the time you buy it to the time you ship it and book the revenue, how long is that typically?

I guess about one month. Basically one month. But, this time it's worse because during the hard drive big shortage, we tried to grow our inventory level. So, it grew to about -- almost six weeks to seven weeks. And that's about a worst-case.

Okay. So, then let's flip back to the other part of maybe what's impacting margin, and that's kind of mix. So, would you characterize the balance of the impact, then, Howard, in this last quarter mostly coming from mix, which kind of tilted unfavorably toward you guys?

Well, there's certainly a portion of this. But, I do want to make sure that -- like I said, I've said over about 2% of the 2.5% margin impact was due to the hard disc drives and memory.

Certainly there is some related to mix. I mean, we did ship less server systems than we did in the prior quarter.

Okay. And then, just to now go back up to where you're seeing the demand come from, I mean, and I'm sure some of this is tied, and I know you talked about sort of the data center being a little bit lumpy or people waiting. And so, I get that. I mean, 40% is a big change quarter-to-quarter, though.

But, as you also look geographically, I mean, the US is down 15% and yet Europe was up a little bit, which seems a little bit counterintuitive in a way. Asia, I believe, being up 34% quarter-to-quarter, that makes sense. But, anything you can attribute to the different shifts you have there, both geographically and sort of where -- end markets this is coming from?

Yes. I mean, USA is more competitive in that two quarters, especially when we have hard drive high price pressure.

And another factor, I believe, because of our FatTwin. Our FatTwin is really a remarkable architecture, and we also experienced some customers waiting for that. The good thing is that product line is in production now finally, so that will help our performance in this quarter, December quarter.

Okay. So, Charles, just to make sure I'm understanding this right, what you're implying is that because you had higher priced systems, particularly here in the States because of your hard drive problems, you were less competitive against maybe Dell or HP. Is that accurate?

Basically yes.

Okay. And so, you think with the new products here into December, we should be in better shape. So, how would you think then, I guess geographically relatively? Would you assert that the US would be now relatively stronger quarter-to-quarter versus, say, Europe if you're looking into December? Would that be your expectation?

Because the USA market is more sensitive in technology, whenever we introduce new architecture, USA market basically responds quicker. That's another factor.

Okay, understood. And last question. Howard, you mentioned an almost $600,000 write-off in marketing materials. And that was in this quarter?

That's correct.

And that seems like a lot. What was that about?

It was more of just some of our demo type of equipment that we have out there in the field as we were promoting the new products and what have you.

Okay. I'm sorry. I took that to be like papers and displays. Sorry. Okay, got you.

No problem.

Thanks.

Brian Freed with Wunderlich Securities.

Good afternoon. Just drilling down a little bit more on the hard disc drive, can you talk a little bit about what specific steps you are able to take to alleviate the impact of future erratic prices, both on drives and memory? Are there any ways to, one, exit the long term pricing contracts or, two, increase the frequency of the repricing?

And then secondly, could you give us any additional color around the current utilization rate of your new manufacturing facility and how that transition is going?

Okay. I mean, for hard drive inventory question again, usually we keep a three to four week inventory for hard drive and memory. But, again, during the hard drive big shortage timeframe, for safety we raised the inventory level to seven weeks. So, that kind of created big trouble when the price had a big drop, right? And again, basically we keep about three, four weeks inventory.

As to the facility utilization, I mean, the Asia facility for sure is big incremental to us. And last quarter, we have a 65% growth compared with one year ago, so that dramatically improved our utilization. And today, I would have to say we have maybe 30% capacity use. So, there is still 70% room to grow, and we feel very positive for that capacity available.

And can you talk about what your targets are in terms of increasing that utilization of your capacity there?

Okay. I mean, again, last year we grew about 65% in Asia. And next year, I hope we can grow more than 65%. So, if we grow 65%, then utilization will reach almost 65% to 70%. So, that will be a much better position.

Okay. And how material do you think that doubling of your utilization could be on your gross margin profile?

It all depends. If we grow in Asia, as you know, Asia market margin a little bit lower. But, if we use those capacity to support customers in Europe, then the margin will be slightly better.

Okay. And then, my last follow up on the hard disc drive inventory, understanding it had gotten up to seven weeks, are you down to three to four weeks at this point in time, or are you still somewhere between three and seven weeks?

I guess about four weeks as of this moment.

Thank you.

Glenn Hanus with Needham.

On Asia, could you just talk a little bit more about the strength over there? Did you have some customer specific rollouts that -- wins that you had or the general strength in the region? Thanks.

Yes. I mean, since 18 months ago, we start to aggressively grow our sales and marketing team, our FAE and PN team. So, that's why we grew 65% last year, right? So, this trend will continue for sure, and because we already enabled also for our pressure conveyor and others can start to buy product.

Can you comment on your operating expense plans now going forward?

Yes. Glenn, we're going to obviously continue to invest, but we're watching it very closely as far as our operating expense. I think you'll note that operating expenses were basically flat quarter-to-quarter, right? And so, we'll continue and invest in our R&D, but we'll be very prudent with our investments going forward.

All right. Thank you.

Aaron Rakers with Stifel Nicolaus.

Yes. Thanks. A real quick one, the Internet Data Center vertical. Just looking the numbers, you were down about 43% sequentially by my math. Can you talk a little bit about what you're seeing in that vertical? And I think you alluded to deals pushing out. Was that specific to that vertical? And if such, was there any large deals that possibly pushed out in the quarter?

Yes, I guess we saw some account is kind of coming back.

And Aaron, for ourselves, yes, we did push out. I mean, there were some customers that -- as you know, data centers are looking at the latest technology, so they were evaluating the Sandy Bridge. And so, they didn't quite finish their evaluation at the end, but we still believe that they're going to be coming in.

So, again, it's the transition to the new technology. We're seeing that they like our new products, especially with the Sandy Bridge, and they just need to get through the testing process.

Okay. Thank you.

I would have to say especially the FatTwin new architecture.

Robert Maina with CRM LLC.

Yes, thank you for taking my question. I just want to get a quick update on something you said early in your presentation, Charles. You said that you were working to improve your inventory and manage the component supply chain better. Can you exactly tell us what processes you're putting in place to make sure that in the future you do a better job of managing this? Thank you.

Okay. Yes, basically the Thailand flood is kind of -- almost never happened before. It picked price up in Thailand in about a five month timeframe. So, from there, we already enhance our relationship with all the hard drive as well as memory company relationships. So, now we have a much better high level relationship and have some contracts signed.

And with that, we also have a dedicated position inside the company now to watch those market changes and those vendor policy strategy changes. It kind of has become a routine job in our Company now.

Okay. So, then if I could just ask a math question, if we get to the end of the quarter and you see a similar price decline in HDD components like you saw this past quarter, does that mean gross margins go lower than the 13%, or can you buffet that somehow with some of the new processes you've put in place? Thank you.

First, I am very happy to say that our hard drive and memory inventory already are lowered to a much more healthy level. We're lower about $13 million?

$13 million overall, $10 million.

Over $10 million just in hard drive and memory inventory. So, that for sure dramatically improves our position. And likewise, as I say, we now have a dedicated position to watch those changes periodically. So, that should prevent it from -- to minimize that risk.

Okay. But, if I look at the inventory level, it's still at a fairly significant level relative to previous periods. How much maybe of the inventory is related to components, hard drives, and memory? Thank you.

Like Howard just mentioned, yes, hard drive. And indeed it is hard drive that we already reduced more than $10 million.

That's correct.

And overall inventory still high because we expect kind of good revenue this quarter for sure, especially with FatTwin and our special Workstation HFT optimized solution. So, we do need more inventory to prepare for a strong demand this quarter.

Okay. I'll follow up offline. Thank you.

And this does conclude the question and answer session of our conference call. And I would like to turn the conference back over to Mr. Liang for any 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 first quarter fiscal year 2013 conference call. We do appreciate your participation. You may now disconnect. Thank you.