超微電腦 (SMCI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Third 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 today's Company's presentation all participants will be in a listen-only mode. Afterwards securities analysts and institutional portfolio managers will be invited to participate in a question and answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded Tuesday April 23rd, 2013. A replay of the call will be accessible until midnight May 7 by dialing 1-877-870-5176 and entering conference ID number 2907442. 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 third quarter fiscal year 2013, which ended March 31st, 2013. 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 risks 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 these 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 third quarter.

We are pleased that our third quarter revenue was $278 million. It's 4.6% lower quarter-over-quarter and 15.8% higher year-over-year. Non-GAAP net income was $10 million or 28.1% higher quarter-over-quarter and 13.8% higher compared to last year.

Super Micro's non-GAAP earnings per share was $0.23 per diluted share compared to $0.18 last quarter or $0.19 last year. Slide five please.

Geographically revenue in North America was 56.6%. Europe was 22% and Asia was 19% of total sales. As expected, Asia was slowed last quarter due to the Chinese Lunar New Year.

41.2% of our overall business came from OEMs and direct customers of which Internet Data Center was 10.8% of sales. Our server system contributed 41.8% of revenue and ASPs remains stable. Slide six and seven please.

The typical March quarter seasonality was evident in the lower sequential revenue. However, we are pleased that the revenue for the quarter was up 15.8% from last year.

We are confident with this constant growth during the time when global economy weakness continues to impact IP spending. Our revenue growth this quarter much outpaced our competitors and we continue to grow at a (inaudible) or our industry's average.

Super Micro continues to take market share by providing the industry's most innovative products that feature the best performance per watt, per dollars and per square foot.

Competition in the industry continues to intense due to big changes taking place with tier one competitors. In addition, the PC market continues to decline over the past year, which forces competitors to concentrate more on data center, cloud and enterprise markets for growth and profitability. Also, other oversea competitors entered the market with limited commodity product set and vendor lower priced product. There is a target on specific market segments. That results that the winning deal will only go to those companies that have optimized solutions for customer's key requirements of technology dealership in density, power savings and performance, total cost of ownership and storage solutions and service.

Super Micro wins because of our past investment industry-leading technology, net storage, GPU, MicroCloud and FatTwin. In addition, we are uniquely positioned in the industry to include value added solutions with software and service on a global scale and at the same time provide cost driven solutions.

Combining technology leadership and services enable us to provide truly optimized solutions for our customers. For example, we experienced a very strong customer demand since the FatTwin launched about two quarters ago. Our past (inaudible) this many in the FatTwin architecture enabled us to provide the best product platform in the industry in terms of computing density, storage density and energy power savings.

Moreover the FatTwin product line continues to grow and provide an optimized way to serve more customers storage, HPC and cloud computing requirements. We started with the high storage density model that can feed up to eight hot swappable 3.5 inch hard drives in 1U platform node and A node from IO models. They achieve 16% less power consumption compared to other high density solutions.

We recently launched the HPC FatTwin that can accommodate up to 12 GPU or Xeon Phi cards in 4U. A Hadoop optimized FatTwin is also available recently.

In summary, the FatTwin product line now offers over 12 optimized variations for customer applications and all of them generating strong order flows.

The MicroCloud product line also showed a greater growth this past quarter. It was released about a year ago and has been one of our strongest product launches ever. Our investment in our MicroCloud architecture has provided the industry's leading scale of solutions for cloud and web hosting applications.

We first launched the (inaudible) cloud infrastructure solution last year. Recently we had increased density to 12 nodes and the 24 node configuration will be available very soon. Our quest for high density computing did not end there. We will later introduce a 6U compact solution that can house over 100 atom based computing nodes with built in redundant switch making it [actually] the densest high performance cloud data center solutions in the industry. With this industry leading innovation in technology we are very confident that our MicroCloud product line is geared for market share gains.

Storage also continues to show a strong growth. In addition, we are continuing to expand our storage product line to include a wider range of Hadoop optimized solutions for Big Data and other applications. The latest has been the SC A47B 4U enclosure with unique excess of engineering prowess. Customers can access all 72 3.5 inch hard drive in an external hot-swappable fashion on the SC A47B, which greatly improves the accessibility of the high density storage in the data center environment. The SC A47B is becoming one of our hot list of products.

GPU continues to grow strongly and achieved higher gross year-over-year. We have upgraded our technology for the latest graphic processor including NVIDIA's K1 and K2 GPU card for greater computing and Intel's Xeon Phi coprocessors.

As I mentioned before, our new FatTwin GPU solution fits up to 12 GPUs or Intel Xeon Phi coprocessors in 4U, which is one of the fastest GPU solutions in the industry. Super Micro's reputation for innovation and technology leadership in GPU allowed it to gain GPU March sales that is much greater than our size in the industry.

The FatTwin GPU solution will allow us to extend our leadership due to the energy saving and performance per dollars architecture of FatTwin. In addition to our hardware solutions, Super Micro's data center management, SDCM software suite, including [in bend] and [out bend] FIOS firmware and software updates and the monitoring utilities have been serving several large corporate data centers.

Again, this quarter we continue to grow our ability to generate additional revenue streams. In summary, our third quarter performance again demonstrates our ability to get market share because of our industry-leading technology and innovative solutions.

We continue to build on our foundation as a global enterprise with global production and logistics capability. We continue to invest in our technology and further develop our software and service capability. We face the future with confidence in our strong position in the industry and our unique approach of providing (inaudible) application optimized solutions for tomorrow's IT requirements.

For more specifics on the third quarter, let me turn it over the 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's and 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 third quarter income statement. Please turn to slide eight.

Revenue was $278 million, up 15.8% from the same quarter a year ago and down 4.6% sequentially. An increase in revenue from last year was primarily due to strong growth in our energy efficient high density products, which are growing in importance as cloud and Big Data applications continue to push demand for solutions offering the best TCOs.

With the new technology releases from our partners such as Intel, AMD, NVIDIA, etcetera, Super Micro is strongly positioned to capitalize on it with our innovative application optimized platforms.

The sequential decrease in revenue from last quarter was primarily due to seasonal weakness as well as concerns about the economy. We saw strength in the US as revenues was comparable to the prior quarter.

Europe was weaker due to economic concerns and Asia started out as expected but when the pause caused by the Lunar New Year we saw business come back later in the quarter than expected. We continue to see a good ramp in Sandy Bridge products with an increase of 7% sequentially representing about 65% of our Intel based revenues.

Slide nine; strange product mix but fortunate revenues from server systems was 41.8% of total revenues, which was down from 48.5% the same quarter a year ago and down from 43.3% last quarter. AFPs for servers was $2,100 per unit, which is up from $2,000 last year and the same as last quarter.

We shipped approximately 54,000 servers in the third quarter and 1,111,000 subsystems and accessories. The decrease in server units from the prior year resulted in part from a decrease in our Internet data center revenue. However, on a compute processing, processing compute basis, we shipped more high density solutions than in prior years. This is reflected of the increase in density, which are customers as well as the rest of the industry are driving for.

We continue to maintain a diverse revenue base with over 600 customers and none of these customers representing more than 10% of our revenues.

Internet data center revenues was 10.8%, which was a decrease from 14.2% in the prior quarter. Furthermore, 56.6% of our revenues came from the US and 58.8% from our distribution and resellers.

Slide 10 and 11; non-GAAP gross profit was $39.1 million, down 4.4% from $40.9 million in the same quarter last year and down 3% from $40.3 million sequentially. On a percentage basis, gross margin was 14.1%, down from 17% a year ago and up from 13.8% sequentially.

Price changes from Ablecom resulted in two basis points favorable change to gross profit in the quarter with total purchases representing approximately 18.8% of total cost per goods sold compared to 20.1% a year ago and 15.4% sequentially.

The year-over-year decrease in gross margins resulted from price changes in hard disk drives as well as unfavorable product mix in the current quarter when compared to the prior year. The October 2011 flood in Thailand has caused volatility in pricing and supply of hard disk drives over the past year. Sequentially gross margins were up due to increase in margins of our server boards and chassis as customers paid more for application optimized products and a more stable pricing of hard disk drives offset in part by a higher mix of subsystems and accessories.

In general we have higher margins in complete server solutions than in subsystems and accessories. Slide 12.

Operating expenses were $30.8 million, up from $28.7 million in the same quarter a year ago and up from $29.8 million sequentially. As a percentage of revenues operating expenses was 11.1%, down from 11.9% year-over-year and up from 10.2% sequentially. Operating expenses was higher on an absolute dollar basis year-over-year and sequentially.

We saw year-over-year increases in absolute dollars, primarily in R&D, as we invested in headcount to drive our innovation and our product portfolio with increased performance in density and power efficiency. Sequentially operating expenses was high or up due to higher sales and marketing expenses related to a European trade show, which occurred as well as other promotional and cooperative marketing expenses such as new product rollouts of about $641,000.

In addition, we booked an accounts receivable reserve of about $621,000.

The Company headcount increased by seven sequentially to 1,568 total employees. We continue to control our operating expenses while still making strategic investments in our product lines.

Operating profit was $8.3 million, or 3% of revenues, down by $3.9 million from $12.2 million a year ago and down by $2.2 million from $10.5 million sequentially. Net income was $10 million or 3.6% of revenues, up $1.2 million from $8.8 million a year ago and up $2.2 million from $7.8 million sequentially.

Our non-GAAP fully diluted EPS was $0.23 per share, up from $0.19 per share a year ago and up from $0.18 per share sequentially. The number of fully diluted shares used in the third quarter was 44,498,000.

The tax rate in the third quarter on a non-GAAP basis was a negative 23.1% compared to 26.6% a year ago and 24.5% sequentially. The rate was lower due to the release of liability for taxes as a result of a resolution of a tax audit during the quarter, which contributed about 5/10ths to our EPS, and the retroactive restatement of the R&D tax credit in January, which contributed another 5/10th to our EPS.

We expect the effective tax rate on a non-GAAP basis to be approximately 23% for the fourth quarter, which is down from 31.6% in the same quarter last year.

Turning to the balance sheet, on a sequential basis cash and cash equivalents and short and long-term investments were $96.7 million, up $5.6 million from $91.1 million in the prior quarter and up $4.5 million from $92.2 million in the same quarter last year. In the third quarter free cash flow was a positive $6.4 million primarily due to an increase in accounts payable to support additional inventory for the coming quarter.

Accounts receivable increased by $3.4 million to $122.3 million and DSOs was 39 days, an increase of two days from 37 days in the prior quarter. Inventories increased by $13.7 million to $257.3 million with the days in inventory increasing by one day to 94 days. The increase in inventory was due primarily to the increase in forecasted revenue for the seasonally strong fourth quarter.

Accounts payable increased by $14.2 million to $163.6 million with the days payable outstanding increasing by six days to 59 days, primarily due to the increase in inventories late in the quarter, as mentioned above.

Overall cash conversion days, trackful days, was 74 days, a decrease of three days from 77 days in the prior quarter.

Now, for just a few comments on outlook, as indicated previously during the third quarter we saw seasonally -- a seasonally weak quarter and some economic uncertainty. In the midst of this we grew 16% year-over-year to the rise in importance in energy efficiency in compute density, which we have pioneered for many years. As we enter the fourth quarter, we continue to see this growing in importance and look to continuing the ramp of our energy and density optimized solutions in this quarter, which is typically a strong quarter for the industry.

Therefore, the Company currently expects net sales for the quarter ended June 30th, 2013 in the range of $295 million to $315 million. Assuming this revenue range, the Company expects non-GAAP earnings per share per diluted share of approximately $0.17 to $0.22 for the quarter.

With regard to our target model, over the next 12 to 18 months we will target 16% to 18% gross margins and 6% to 8% operating margins. We continue to expect to see improvements in our gross margins from increasing utilization of our Taiwan facility, improvements in our product mix to our complete solutions, improvements in purchasing power as we grow our business and the addition of services and software to our revenue base.

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. We were successful this past quarter in growing market share because we consistently offered our broadest array of application optimized service solutions. Our leading technology and system architecture plus now including system management software and service are critical to our future growth. We will continue to focus on our increasing market share by leveraging our world-class products, innovation and brand recognition. Our growth story remains intact. Our people are committed to succeed and our opportunity remains as great as ever.

Operator, at this time we are ready for questions.

Thank you, sir. Ladies and gentlemen, and question and answer session will be conducted electronically. (Operator Instructions). Finally, we ask that you limit yourself to one question and one follow-up until all in the queue have an opportunity to ask a question. We will come back to your question for additional questions later. (Operator Instructions).

And we'll go first to Aaron Rakers with Stifel Nicolaus. Aaron Rakers.

Thanks for taking the question. I was wondering if you could comment on the -- it looks like hard disc drive pricing has stayed relatively benign over the past few quarters but I was wondering if you could comment on memory pricing, what you're seeing there? And then I'll have a follow-up.

Yes I mean the hard drive price is getting stable for many quarters already and memory pricing keeping growing since about two to three months ago and we expect these prices will continue to grow but because we have a very solid and strong relationship with our supplier, and so with our old and strong partnership I believe our support supply in the memory should be stable in coming quarters.

Okay great thanks. And then I wanted to talk a little bit about your enterprise data center segment. It looks like you saw a kind of a slowdown in that segment this quarter. Is that from maybe an increase in competition relative to maybe HP's Moonshot announcement, you know Quanta's announced that they are looking to double their direct server business in 2013 and then you'll have a little bit of some comments coming from out there saying that IBM and Lenovo are -- might strike a deal for their X86 business?

Yes indeed in this segment we feel very optimistic for a couple of reasons. One is our FatTwin. We introduced our FatTwin [profile] about four to five months ago and the program has been growing very stably and we did see a good demand on the coming quarter and other than that about 16 months ago we introduced our MicroCloud solution, which is high density for cloud application of web hosting. That program has been growing very well in last 16 months and recently indeed there we are planning to introduce another solution. As I just mentioned, it will be 6U, 6U support more than 100 atom base, low power processor, and the system I believe will out perform the competition.

So and with our Asia facility now the utilization there is growing. Facility is getting mature so we do believe we will continue to improve our cost and when that continues to happen we will be more capable to compete in the high volume data center cloud applications. So in this area I do feel very optimistic.

Okay great. Thank you.

Mark Kelleher, Dougherty & Company.

Great. Thanks for taking the questions. Just as a follow-up to that question, IBM selling its X series to Lenovo, would that be a -- would you consider that an increased competitive threat or a decreased competitive threat?

Both I guess. That's why, I mean we invested in Asia two years ago to enhance our production capability and cost competitive capability so now the Asian operation is ready so we are able to compete in Asia market. And also with the facility there we are able to compete at a low cost, high volume server market in USA and Europe as well, so I believe that change overall won't impact us too much. Now, most important here we need to have a strong product and kind of cost effective solution.

Okay and in terms of product cycles you mentioned where you were with Sandy Bridge. Could you kind of walk through the year and kind of indicate where you think new product cycles might give you a benefit? I know Ivy Bridge comes out and then more after that. Could you kind of step us through product cycles this year?

Yes we like technology change and new technology always means better performance per watt, better performance per dollars. With Ivy Bridge coming very soon, right, in the next few months, we feel we have a very good forecast and the customers coming in from there. And also our (inaudible) is also coming very soon for much faster performance for high end applications and also the UP, right, [uni-process] Intel hardware product line where we launch in the next few weeks and we feel have a very strong product available today. So from those points of view I have to feel our new product line will bring lots of upside for us.

Okay thanks.

Alex Kurtz, Sterne, Agee.

Hi. This is Amelia on for Alex today. Thanks for taking the question. How far along would you say are you with Seagate on contract for HDD pricing and, if so, what does that time frame look like?

Yes this is Howard. Yes we've been in discussions obviously with our vendors all the way along and so we're hopeful that we will have things -- they're looking to us and we're negotiating with them.

Basically we already have a certain reasonable and I would like to say a very positive agreement and that relationship will continue to improve basically.

Thanks and just as a follow-up, are you seeing ODMs like Quanta more active or less active in the market right now? How would you say they are on a competitive front?

You know, those CM from Asia they have a better cost [threshold] and a lower price. From certain stand it's true for certain big data center customers but and that's the reason why we expand our Asian facility kind of strongly in the last two years so our facility from Asia now is pretty ready and however what customer really needs, I mean most of the customers really need, is a TCO, fiscal TCO, so that means that you have the lower cost from the beginning but better quality and better optimization including our performance optimization and power saving optimization, also including a management (inaudible) on total solutions so indeed most of market -- I mean our customers -- feel care, that they are TCO in total.

Okay thank you.

Glenn Hanus, Needham.

Could we dive a little bit more into -- so you have a new target for gross margin? You know, you had talked about a 300 basis point improvement from abatement of the HDD and memory issue. Can you sort of bridge us from the 19 and now you're kind of talking of 17 if I take the middle of the range? What are the factors that are going into the reduced gross margin guidance and sort of rank the factors that are contributing to that? Thank you.

Yes I guess the competition is getting stronger, right, compared with three years ago or four years ago so we fully understand that. However, our product mix is getting stronger back of FatTwin, back of the MicroCloud and especially strategy GPU, right? Also our projects in value power is getting stronger too together with our software value, our service value and operation with lower cost from Asia, that all will help us and that's why in the next 18 months we believe 17% can be a reasonable number.

And the 300 powered the 300 basis point improvement, how should we think about that relative to what you've said in the past there?

Yes, Glenn, this is Howard. A lot, like we said, some of it's come back. Some of it we're still working with our customers obviously or our providers to get that back and so basically we pull that from the model per se in the form of basically just a negotiating with our vendors and put that as improving our purchasing power and our Taiwan facility.

Okay and can you give us any color here sort of sequentially in gross margins? You showed a little improvement this quarter. Would we see sort of a similar improvement next quarter or might we see a greater improvement and what are the factors that are kind of really driving your sequential gross margin improvement or lack thereof right now?

Yes with regards to the June quarter, you'll find that's seasonally a strong quarter so coming out of this March quarter, which is seasonally weak, you see a lot of competition happening for a smaller pot so that meant you put some pressure on margins where we did pretty well with that. Also, again, our product mix hurt us a bit this past quarter, end of March, and so as we go into the June quarter, hopefully we'll see that come back a little bit more towards our full server solutions so those come with [partners].

Okay and then typically you have a pretty healthy uptick in OpEx in the June quarter. You'd have to in order to get to your guidance there so can you go through that?

Generally actually we're trying to keep a -- we're being very prudent with our operating expenses going forward as far as we're making the strategic investments that we need to, as Charles alluded to, on new products and innovation but we're going to be keeping a tight handle on it. We've invested a lot over the last year or two.

Okay thank you.

(Operator Instructions). And it appears at this time we have no further questions. I would like to turn the call back over to Mr. Liang for any additional or closing 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.

This concludes today's conference. We thank you for your participation. Thank you, ladies and gentlemen. That does conclude Super Micro third quarter fiscal 2013 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.