超微電腦 (SMCI) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by.

Welcome to the Super Micro Computer Incorporated second 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 in a listen-only basis.

As reminder, this call is being recorded Tuesday, January 22, 2013. A replay of the call will be accessible until midnight February 5 by dialing 1-877-870-5176 and entering conference ID number 3074743. 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 second quarter fiscal year 2013 which ended December 31, 2012. Before we begin I like to advise you of upcoming investor conferences in which Super Micro will be participating. On February 6 we will present at the Stifel Nicolaus 2013 Technology Conference in San Francisco 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 Relation section of the Company's website under the events and presentations tab.

Please turn to slide 2. Before we start I will 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 those 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 3 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 is in the supplemental information attached to today's presentation.

I will now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you, Perry, and good afternoon everyone.

Please turn to slide 4. First let me provide you with the highlights of our second quarter. We are pleased that our second-quarter revenue was $291.5 million, it's 7.7% higher quarter-over-quarter and 16.6% higher year-over-year. Non-GAAP net income was $7.8 million or 156.5% higher quarter-over-quarter and 29.9% lower compared to last year. Super Micro non-GAAP earnings per share was $0.18 per diluted share, compared to $0.07 last quarter and $0.25 last year.

Slide 5 please. Revenue for the quarter was 16.6% from last year and was a record high for Super Micro. We are pleased with this growth in sales when overall IT spending continued to be pressured. With this performance we continue to demonstrate our ability to take market share even during uncertain economical times. Last quarter's margins improved quarter-over-quarter, however we still see opportunities for further improvement. Although, a little [tangwo] pricing change continued last quarter in hard disk drive. We saw the market for hard disk drive and memory modules stabilize for the most part.

However, because we had record high storage revenue which contained low margin mix with hard disk drive, our storage margins were lower than average server margins. As it turned out, the overall margin for our storage solution still improved quarter-over-quarter. With the component [slows] and price stability in place, we expect our margin performance to further improve in future quarters.

Geographically, revenue in North America was 53.7%, Europe was 23% and Asia was 20.7% of total sales. Asia remains our fastest growing region and our Taiwan facility continues to ramp steadily to meet our goal for the Asia market. Asia revenue growth was 34% over last year, mostly due to high quality products produced from our state of the art equipment at our facility in Taiwan. We continued to instill confidence in our customers and focus on growing our share in dynamic region where different product strategies have been employed on a country by country basis.

Last quarter 45% of our business came from OEM and direct customers, of which Internet Data Center were 14.2% of sales. Our complete services systems contribute 43.2% of revenue, where we saw our strongest quarter-over-quarter growth among product lines such as FatTwin, MicroCloud, Storage and GPU.

We had experienced a strong customer demand since the FatTwin launch. Customers prefer our efficient power consumption storage capacity and computed intensity over our competition. The inventory turnover rate for FatTwin have been the highest due to the popularity. On a year-over-year comparison our storage products also show strong growth due to the ability of hard disk drive compared to last year.

MicroCloud has grown strongly since its launch last year and has become one of the biggest product lines in only one year. Also GPU Solutions continues to show solid growth along with development of newer technologies. Overall, our brand reputation for innovation is greatly helping us and continues our trend of taking market share. Let me now update you with more details on our new and leading technologies.

Slide 6 and 7 please. The recent launch of FatTwin marks a big new milestone in our five-year twin architecture history. It further improves system power saving up to 16% when compared with other similar platforms from our major competitors, optimized for various applications with features such as a 3.5-inch hard swappable hard drive per 1U, or 3GPU (inaudible) coprocessors per 1U.

More recently, there have two optimized FatTwin features up to 12 3.5-inch hard drive in 1U space, designed specifically for hadoop Cloud applications. FatTwin's high-efficiency, highly effective shared cooling subsystem and power supply architecture allows FatTwin to operate at higher ambient temperatures, free air cooling environment, up to 47 degrees C, providing huge energy cost savings and improved TCO, total cost of ownership.

Our new MicroCloud server, 3U 12 hot pluggable nodes has been shipped in volume for a couple of months. It is a perfect solution for high density and power process sensitive data center environment. Along with our older generation A hot-pluggable node version, the MicroCloud product family now supports the latest Intel and A and B processor. It has benefited many customer in Cloud computing with hosting and IP data center segments.

Our brand new Storage A47 B product line, one of our big data optimizer solutions introduced a highly innovative way to increase system storage capacity, support up to 72 external hard swappable 3.5-inch hard drive in 4U space, high efficiency system design and optional battery backup power unit. The system specification is, [mind you] second to none, but is actually 20% higher in storage density compared to our competition. The product is currently in the simple stage and we have received a very positive commitment from our customers.

Our HPC Optimizer products provide extreme performance in competition in web intensive applications. The latest system offer optimized to support our latest NVIDIA K10 and K20 GPU and Intel Xeon 5 co-processors. Our new high speed product line featured in Turbo Boost with optimal FastTen global tracking capability is optimized for HFT, high-frequency trading, high-performance EDA and high end gaming.

BBP, 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 its system enclosure. It's an unconventional and yet highly efficient and cost-effective way of protecting data and operation investment.

Super Micro Data Center Management, SDCM, [total ware] including inpen and outpen BIOS firmware and software update and system monitoring utility have been serving several large corporate data centers. These software features and supportive abilities have been helping the sales of our hardware as completed solutions to these direct accounts. They have also been supporting our channel partners to be more competitive by providing more complete system management solutions to their customers. That's the product new.

Our complete solutions include high-performance, high-density servers, high-capacity storage, high-performance switch, and our data center management software, all designed and supplied by Super Micro. Recently we expanded our solution by introducing the Hadoop SuperRack for Cloud computing and the GPU SuperRack or HPC applications. They are actually cost effective, flexible to scale and among the [hardest] of choice for many enterprise customers.

In summary, in the second quarter Super Micro achieved record revenue at the top end of our expectations. With our strong foundation in place, we again demonstrate our ability to gain market share even during uncertain economic times. The challenge for Super Micro is to grow even stronger and faster this year and our people are excited about our opportunities. Our brand and reputation is built on having a product line there, basically in the world, in performance per watt, per dollars, and per square foot. With these strong products and our dedication to being the best, we are prepared to seize the opportunities for growth and profitability.

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 margins, 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 second quarter income statement. Please turn to side 8. Revenue was a record $291.5 million, up 72% from the same quarter a year ago, and up 8% sequentially. The increase in revenue from last year was primarily due to the strong growth in MicroCloud Storage and GPU. The sequential increase in revenues from last quarter was primarily due to seasonal strength in the industry and the growth of some or our innovative product lines, offset in part by concerns about our economy.

On a percentage basis, MicroCloud and Storage were the fastest-growing product lines from the prior quarter. MicroCloud has been a great product for the Internet Data Center with its density and power efficiency. Storage has benefited from the stabilization of hard disk drive pricing and availability. We continue to see good ramp in the Bridge products with an increase of 64% sequentially.

Slide 9. Turning to product mix, our portion of revenues from Server Systems was 43.3% of total revenues, which is down from 44% the same quarter a year ago and an increase from 39.5% last quarter. ASPs for servers was $2,100 per unit which is up from $1,800 last year and $2,000 last quarter. We shipped approximately 60,000 servers in the second quarter and 1,086,000 subsystems and accessories. The increase in the server units resulted in part from an increase in our Internet Data Center business.

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 14.2% which was an increase from 8.8% in the prior quarter. Furthermore, 53.7% of our revenues came from the US and 55% from our distributors and resellers. During the quarter we saw strength in the US which offset some of the weakness in Asia while Europe remained about the same on a percentage basis. As we ramp our Taiwan 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 $40.3 million, down 6% from $42.8 million in the same quarter last year and up 14% from $35.3 million sequentially. On a percentage basis, gross margin was 13.8%, down from 17.1% a year ago, and up from 13% sequentially. Price changes from Ablecom resulted in 8 basis point favorable change to gross profit in the quarter with total purchases representing approximately 15.4% of total cost of goods sold compared to 18.5% a year ago and 20.9% sequentially.

The year-over-year decrease in gross margins result from price changes in hard disk drives and memory in the current quarter compared to the prior year. December 2011 was right after the October floods in Thailand which has caused volatility in pricing and supply of hard disk drives over the past year. Sequentially, gross margins were up almost entirely due to the more stable pricing of hard disk drives, offset in part by a higher mix of storage products. In general, our other product margins remained stable.

Slide 12. Operating expenses were $29.8 million, up from $26.6 million in the same quarter a year ago and down from $30.7 million sequentially. As a percentage of revenues, operating expense was 10.2%, down from 10.6% year-over-year and 11.3% sequentially. Operating expenses was higher on an absolute dollar basis year-over-year and down sequentially. We saw year-over-year increases in absolute dollars, primarily in R&D as we invested in head counts to drive our innovation and product portfolio, especially in preparation for Romley and FatTwin launches.

Sequentially, operating expenses were down. Production and marketing and sales expenses associated with the write-off of marketing materials of about $590,000 in the prior quarter. General and administrative expenses were lower due to lower legal expenses and settlement of a patent control case of about $700,000 in the prior quarter.

The Company's head count increased by 34 sequentially to 15 -- 1,561 total employees. We continue to control our operating expenses while still making strategic investment in our product lines.

Operating profit was $10.5 million, or 3.6% of revenues, down from $5.7 million or $16.2 million a year ago, and up by $5.9 million from $4.6 million sequentially. Net income was $7.8 million or 2.7% of revenues, down from $33.3 million from $11.2 million a year ago and up $4.8 million from $3.1 million sequentially. Our non-GAAP fully diluted EPS was $0.18 per share, down from $0.25 per share a year ago, and up from $0.07 per share sequentially. The number of fully diluted shares used in the first quarter was 43.666 million.

The tax rate in the second quarter on a non-GAAP basis was 24.5% compared to 30.5% a year ago and 31.3% sequentially. The rate was lower due to the release of liability for taxes and contributed about $0.02 to our EPS. We expect the effective tax rate on a non-GAAP basis to be approximately 6% for the March quarter which is down from 26.6% in the same quarter last year. The decrease in tax rate is due to the reinstatement of the R&D tax credit which passed in January 2013. The effect was about 19% reduction to what we would expect our tax rate would be with R&D credits without catch up for prior periods.

Turning to the balance sheet on a sequential basis. Slide 13. Cash and cash equivalents and short and long-term investments were $91.1 million, up from $29.8 million, from $61.3 million in the prior quarter, and down $15 million from $106.1 million in the same quarter last year. In the second quarter, free cash flow was a positive $30.3 million, primarily due to the reduction in inventory.

Slide 14. Accounts receivable increased by $6.1 million to $118.9 million and DSOs was 37 days which is the same as the prior quarter. Inventories decreased by $19.6 million to $240.6 million with days in inventories decreasing by 12 days to 93 days. The decrease in inventory was primarily due to reductions of our component inventory, such as memory, CPU and hard disk drive. We continue to strengthen our infrastructure in this area to improve our management of our inventory, as well as improve our vendor relationships.

Accounts Payable decreased by $9.4 million, increased by $9.4 million to $149.4 million, with the days payable outstanding decreasing by 8 days to 53 days, primarily due to timing of payments to vendors. Overall, cash conversion cycle days were 77 days, a decrease of 4 days from 81 days in the prior quarter.

Now, for a few comments on our outlook. As indicated previously, during the second quarter we continued to see the ramp in our Sandy Bridge products as well as very good interest across our product lines. Hard disk drives have stabilized and we expect this to continue to improve. March is typically a seasonally weak quarter for the industry, however with the growth of our FatTwin storage and MicroCloud, as well as our continued ramp of Sandy Bridge, we feel some strength to offset some of the seasonal weakness.

Therefore the Company currently expects net sales for the quarter ending March 31, 2013, in the range of $275 million to $295 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.17 to $0.21 for the quarter. Excluding the tax benefit for the R&D credit mentioned above, and using a 25% tax rate, the earnings per diluted share would be approximately $0.14 to $0.18.

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

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

Thank you, Howard.

Super Micro is focused on increasing market share by leveraging our strong advantage of brand recognition for our best in class products and innovation. Our growth story remains intact. Our people are committed to succeed and our opportunities remain as great as ever.

Operator, at this time we are ready for questions.

Thank you.

(Operator Instructions)

Aaron Rakers, Stifel Nicolaus.

Thanks, guys for taking the question. First, I want to make sure I heard you right, 6% tax rate in this March quarter. If you look at that over the trailing, the implied trailing three quarters, then it would be about 19%. What's the tax rate are you assuming on a forward basis as we think about June and beyond that?

Aaron, this is Howard. As I mentioned it is about 19%, if we didn't have the catch up, it would be about a 19% difference so it would be about 25%.

25%? Okay.

Yes.

So underneath of that one when we look at assuming that you continue to maintain your OpEx discipline that you been doing, are you assuming that what looks to be like a 14.5% gross margin, and I think if that's true, how are we to think about what's been talked about as being a 350 basis point overhang from the hard disk drive and memory pricing that seems to be lifting here? When do you recapture or rather, when do you get back up into that 16% gross margin range?

Aaron, this is Howard. Like I said, we are still working our way, we still believe that there's more to be had there as you go back in time. Again, we are not all the way there yet. The majority of this quarter's margin improvement was from the hard disk drives. We see that continue to stabilize and hopefully that will continue to improve. So, there are opportunities there for us to increase.

Along with that though, for this quarter, again, this is a fairly soft quarter from a seasonal basis. So, if you look back historically you'll see that there has been pressure on our margins between December and March. So, we've put in some of that into our forecast for this quarter.

Taking that, what you just said, the 80 basis points sequential improvement is pretty much all hard disk drive-related. Was there no benefit that we saw from a mix shift between the segments?

I think you saw the mix shift primarily come as we mentioned. Some of it was in storage, which typically has a high content of hard disk drives. In addition to that we, our Internet Data Center, which is usually the most competitive area of the business was also up in the quarter.

Final question and I'll cede the floor. Taiwanese facility, what's the utilization rate right now?

Yes, our Taiwan facility continues in improvement mode. So, we had much stronger sales team, supporting team there now, and we see the improving trend is there. So, quarter-by-quarter getting better.

Mark Kelleher, Dougherty and Company.

Great, thanks for taking the question. Just had a few numbers questions. Did you give out the storage as a percent of revenue?

No we didn't, Mark. It still less than 10% of our revenues.

Okay. And of the server sales -- sorry, there's something going on in the line, I'm still here. Sandy Bridge as a percent of the server sales?

As a percent of overall sales we're probably at about 27% overall.

Okay.

Overall revenue.

Okay. Can you give that in server sales or is that too fine?

We haven't broken it out separately. We've been asked previously about what it would be in total.

All right, and free cash flow in the quarter?

Free cash flow in quarter was $30 --

$30 million?

I think it was $30.3 million.

Okay. That's all I got. Thanks.

Glenn Hanus, Needham.

Good afternoon guys. Just start high-level a little bit on the demand environment you feel you are seeing now, US, EMEA, APAC, you mentioned APAC being a little soft this quarter. Can you give us some more color around the demand environment you are seeing for the March quarter in June?

We strongly believe Asia market we are picking up steadily, in March and June, because now our facilities there and our sales team, support team have been much stronger than before. So, we have pretty strong confidence there.

How is the US market looking?

The USA market I believe will be improving as well, especially when we start to spend more in the East Coast and kind of test out Chicago area. So we feel at least in those new territories we will have a stable gain.

And Europe?

Europe kind of also consistently growing. We have a facility there for system integration and supporting function since about two years ago now. So, the facility has been very mature and people have been well-trained. So, I believe we will continue stably going in Europe, as well.

In terms of your overall financial model of getting to 19% gross margin, 9% operating margin, the low-end of the range, I think you've talked about around the end of the year, you talked about a one-year timeframe to get to that. How are you feeling now about, it sounds like a pretty aggressive goal, but how are you feeling about those numbers for, by the end of 2013?

Glenn, we still have lots of opportunities as we talked about before to do that. We've looked at basically increasing our scale, obviously stabilization of hard disk drives, Taiwan facility, increasing our content of software and services as part of it. However, we probably will look at with some of this maybe pushing it out a quarter. So we said before that it's been calendar end of year, may push out a quarter.

Okay. Just moving onto the operating expenses a little bit, could you go through again some of the, you mentioned a write off in the lower legal expenses, could you just kind of go through the OpEx, and it seemed to come down quite a bit sequentially and then for the March quarter, how should we think about OpEx?

We had some unusual items, I think if you want to call it. Those in the September period with regards to product promotions as we were launching the FatTwin and Sandy Bridge and what have you. Those did not recur in the December quarter. We will probably have a little bit more expenses with regards to CBID and some trade shows that we'll have during the March quarter here. However, in general we will still keep a tight handle on our Op expenses, so we won't see a large increase in there.

It is basically the last two and a half years. We had almost, I believe growth 60% of our engineering head count, so now people are well-trained, and we tried not to hire too many people in the coming quarters.

Okay. And on the storage side, could you give a little more color, like what verticals, perhaps, that you are seeing traction in the storage side and how your positioning and differentiating on the storage side. Where you're really getting some traction? Thank you.

Cloud application are picking up, especially, we recently just announced our big data optimizing system, the 4U storage with 72 hard drive, all hard swappable, 3.5 inch supported. That kind of density for sure the best in the world. And I would have to say at least 20% higher density than any competitor. So, those strong product lines will help us grow our market share in storage, including our FatTwin 1U A (inaudible)swappable hard drive, also no competition in the market. So, we have a very strong confidence on storage.

Thank you.

Thank you.

Alex Kurtz, Sterne Agee.

Thanks for taking the question guys. Just a couple of clarifications, Howard. Just when you were talking to Aaron you said 6% non-GAAP for a tax rate for this quarter, for the March quarter.

That's correct.

Then roughly 25% as sort of a go-forward type of framework around tax rate?

Yes, take that for the fiscal year for sure for this fiscal year. We will have to review next, but for this fiscal year it looks about that way with the R&D credit reinstated.

So, you think that the out year to be higher than that? Or, too hard to tell at this point?

It will be a little bit hard to tell at this point, again, tax credit has only be extended for two years, which means it is only half of our fiscal year, so we still need to do bit more work in that area.

Okay. In your presentation Howard I missed the number of components. Can you reiterate that?

Sure. 1.086 million.

Okay. Could you just take us through the last year about all the different, there's been a lot of moving pieces on the gross margin, obviously. And it would be helpful if you could just recant where the major headwinds have been and maybe categorize them by weighting them on certain things being bigger than others. I know obviously this quarter having the bigger Internet Data Center was probably a headwind, but if you could sort of help us around the impact versus last year that would be great.

Yes, so I guess if you want to look back during last year, I think the biggest thing we could talk about and those people who understood it is basically the hard disk drives and memory have been the largest impact to our gross margin over the past years. And this past quarter we did start seeing stabilization of that and that's we saw some of the recapturing of our gross margin. Probably the low point was the September quarter. As that continues to stabilize further as we go forward I think we believe we will see additional benefits coming from there. With regards to the, I'm sorry.

No, go ahead.

The Internet Data Center was higher this period of time, it was about 14.8%, I think. And that's comparable to about 8% in the prior year. Again, as you know that is probably the most competitive area in our niches that we participate in. So again, it puts a little pressure on our margins. Go ahead.

Just last for me, Howard. Getting back to Glenn's question about getting back to that 17% or 18%. Is that still in the cards? Is all of that just coming back from the hard disk drive and the memory component issues? Or do other things have to go right to get back to say 17%, just as a bogey?

Yes, the cushion is there, since many years ago we have spent lots of efforts in suites, especially Data Center optimizing suites and software, management software, as well as customer service. So these are the three areas we will have a much higher margin and we have been invested in this area for many years. And we start to have some income from those three areas, suites, software and service.

What you are saying Charles is that you think product mix along with the HDD market coming back is going to help you get back to the 17% range?

Yes. And those suites, every suite vendor has a much bigger margin right? Management software, for sure. We invested in this area for almost 12 years, and now we start with some income from our management software, service, customer service on side, for sure, also good margin business. And we also invested in this area for many years and now start to see some income.

Thank you, guys.

Thank you.

(Operator Instructions)

Jeff Andry, Wunderlich Securities.

Hey, guys, this is Jeff in for Brian. Thanks for taking the question. Can you talk about what kind of HDD and memory pricing assumptions you are baking in the guidance? And then also you mentioned you continue to better manage inventory and improve relationships with suppliers. Can you talk a little about what steps you've taken in that regard? Thank you.

Yes, of course, over the past year we've increased our personnel with regards to managing our components inventory in all facets, basically in memory and hard disk drives and other parts of our Business. So again, we put more emphasis, laid in more infrastructure there, and that's part of the investment that Charles has talked about in investing our infrastructure to basically improve how we manage our inventory, and also how we build relationships, strengthen those relationships with our vendors. And that's hopefully going to pay dividends for us as we go forward. With regards to the other part -- can you repeat your other question please?

Yes, I was just wondering what kind of HDD and memory pricing assumptions you're baking into your guidance, just taking the midpoint of your guidance figures, it looks like about a 20-basis point sequential increase in profit margin. So, I was wondering what kind of assumptions you are baking into that guidance?

When we continue to move more complete systems, especially storage, that install to a 20, 40 or even 72 hard drive, so there go our margin. However, likewise, we start to add the value like management software, that's service value, so those will help us on a positive side. So, like Howard says, may postpone one quarter, but our original business model, the financial model should be still there.

There appear to be no further questions. I'd like to turn things back over to Management for any closing or additional 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.

That concludes our conference. Thank you all for joining.