超微電腦 (SMCI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. second-quarter fiscal 2014 conference call. The Company's news release, issued earlier today, is available from its website at www.supermicro.com. In addition, during today's call, the Company will refer to a slide presentation that it has made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com, in the Investor Relations section under the Events and Presentations tab. (Operator Instructions).

As a reminder, this call is being recorded Tuesday, January 21, 2014. A replay of the call will be accessible until midnight, February 4, by dialing 1-877-870-5176, and entering conference ID number 9732681. International callers should dial 1-858-384-5517.

With us today is 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 second fiscal year (sic - see press release, "second quarter fiscal") 2014, which ended December 31, 2013. By now you should have received a copy of today's news release that was distributed at the close of regular trading, and it's 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 on the Company's website.

Please turn to slide 2. 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 2013; and our other SEC filings. All of those documents are available from the Investor Relations page at Super Micro's website at www.supermicro.com. We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide 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 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 4. First, let me provide you with the highlights of the second fiscal quarter. We are pleased that the second quarter revenue was $356.4 million. It's 15.3% higher quarter-over-quarter, and 22.3% higher year-over-year. Non-GAAP net income was $15.9 million or 60.9% higher quarter-over-quarter, and 103% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.35 per diluted share compared to $0.22 last quarter, and $0.18 last year.

Slide 5 and 6, please. Super Micro's second quarter was a record high for revenue and earnings. We grew again in multiples over industry's gross rate. Our [ambition] in product innovation and global operations came together this quarter to produce these record results.

Here is basically a breakdown of last quarter's revenue. Our services have contributed 48.8% of our total revenue. 46.6% of our business last quarter came from OEM and direct customers, with the Internet data center accounting for 12.9% of sales, which increased 55.4% from last quarter.

Our continued focus on offering completed systems and total solutions is again ensuring strong progress. More customers from both channel and direct are moving toward taking completed systems from Super Micro because of its higher product quality, better time to market, optimized product performance and power efficiency, and available global logistics support.

Geographically, revenue in North America was 50.4%, and Europe was 23.9% of total sales. Notably, Asia jumped to 23% of our total revenue contribution, which was up from 17.8% last quarter, and 20.7% last year. As I have said before, Asia will become a large part of our revenue story due to our readiness at Taiwan facility. We are able to scale and deliver high-quality products for Asia and certain worldwide customer base.

Europe revenue also was up approximately 27%, comparing to a year ago. North America, our largest and most consistent market, was up significantly in absolute dollars from last quarter. But Asia has shown more strength in terms of total revenue percentage.

In last quarter's earnings, I mentioned several aspects of Super Micro's effort to build a stronger foundation. Allow me to emphasize again the strength of our Company, including our product innovation and global production capacity. Super Micro is continuing to develop further products that have won the marketplace because of their superior application optimization in pure performance -- performance per watt, per dollars, and per square foot.

For example, during the quarter we launched the TwinPro architecture. This approach [inter-treated] for SAS 3.0 storage, NVMe, accelerated PCIe SSD performance, and Titanium-level efficiency power supply, in a data center optimized package.

Other than the TwinPro, we are also preparing to launch the brand-new, ultra-high density, extreme low power MicroBlade architecture on this March, which will support 112 Atom nodes, or 28 fewer processors via nodes, in a 6U form factor. Now, MicroBlade will feature integrated 2.5G or a 10G switch. They will -- were able to introduce the cable [coast] and PCO for our customers. And to extend our technology leadership, the TwinPro and the MicroBlade are a great beginning of things to come in 2014.

We also saw strong growth from many product lines on a year-to-year basis. Our FatTwin, the key product of 2013, grew 129% year-over-year. Our storage solution demonstrate strong growth last quarter by 49% year-over-year, and 24% quarter-over-quarter. Our HPC solutions, including GPU and Xeon Phi, grew 58% year-over-year, and 35% sequentially. The interior Ivy Bridge [supplement] and switch product are also ramping nicely, and helping to create additional demand.

All these products [that this] today, our application optimized solutions, are in great demand by call service, data center, channel partner, and large corporate accounts. As we extend our offering to a software suite that the mostly managed data center and on-site service for mission-critical application customers who need [longer] current level of support, I am confident that this product will become value sources of our stated revenue spend in 2014.

Parallel to our growth in products, our global operation from Beijing is getting much stronger as well. That growth in our Asia business this quarter can be shown [solar] if the utilization of our Taiwan facility that had record high utilization and delivery volume.

In addition, our rapid business growth has driven the need to utilize all available space we have at the Taiwan and bring more production capacity online. As soon as our Taiwan capacity reaches 60% at our existing site, we will begin our next phase of our Asia expansion plan. I strongly believe this preparation will happen this year, as we reach for our $2 billion revenue target.

In summary, Super Micro had a record quarter for revenue and earnings because of our investment we have made to ensure we had room for our growth. We are in the strongest position than ever before. And we are realizing multiple times of industry growth rate as we fast approaching the $2 billion revenue [growth]. Now we are extremely focused on executing our strengths in technology and leveraging our global foundation. We believe calendar 2014 will be a very strong year for Super Micro.

For more specifics on our first quarter, let me turn it over to Howard.

Thank you, Charles, and good afternoon, everyone. I'll focus my remarks on earnings, gross margins, operating expenses, and similar items on a non-GAAP basis, which reflects adjustments to exclude stock compensation expenses. A 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 slide 7. Revenue was a record $356.4 million, up 22.3% from the same quarter a year ago, and 15.3% sequentially. The increase in revenue from last year was primarily due to our increase in service solution sales, particularly in our innovative products such as storage, FatTwin, GPU, Xeon Phi, racks and switches. This, coupled with our management software and support services, has further opened opportunities in the market for us.

On a geographical basis, we had strong growth around the world, with Asia leading the way. The sequential increase in revenue was primarily due to seasonal strength in the industry and continued strength in our innovative products as well. In addition, Ivy Bridge -- which was launched on September 10 -- continued to ramp nicely, benefited by our broad product [line].

Turning to product mix, the proportion of revenues from server systems was 48.8% of total revenues, which was up from 43.3% for the same quarter a year ago, and from 46.4% last quarter. ASP per server was $2700 per unit, which is up from $2100 last year, and up from $2600 last quarter. We shipped approximately 63,000 servers in the second quarter, and 1,173,000 subsystems and accessories.

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 12.9%, which was an increase from 8.3% in the prior quarter, and a decrease from 14.2% in the prior year. Furthermore, 50.4% of our revenues came from the US, and 53.4% from our distributors and resellers.

Slide 9 and 10. Non-GAAP gross profit was $55.3 million, up 37.2% from $40.3 million in the same quarter last year, and up 17.7% from $47 million sequentially. On a percentage basis, gross margin was 15.5%, up from 13.8% a year ago, and up from 15.2% sequentially. Price changes from the [able com] resulted in no basis point change to gross profit in the quarter; and total purchases representing approximately 18.1% of total cost of goods sold, compared to 15.4% a year ago, and 17.3% sequentially.

The year-over-year increase in gross margin resulted from strong vendor relationships; lower provision for inventory reserves, given product transition last year; and a favorable product mix. Sequentially, gross margins were up due to higher utilization of our facilities, favorable product mix, and more complete service solutions; and an increase in purchasing power, due in part to increasing the scale of our business.

Slide 11. Operating expenses were $32.3 million, up from $29.9 million in the same quarter a year ago, and down from $32.4 million sequentially. As a percentage of revenues, operating expense was 9.1%, down from 10.2% year-over-year, and down from 10.5% sequentially. Operating expenses were higher on an absolute dollar basis year-over-year, primarily in R&D, as we invested in personnel expenses to support the development of our products. Sequentially, operating expenses were lower, due to less prototype material and testing fees for the rollout of our Ivy Bridge-based products in September.

The Company had increased by 51 sequentially to 1661 total employees. We continue to focus on leveraging the investments we have made in our infrastructure while still making strategic investments in our product portfolio.

Operating profit was $23 million, up by 118.6% from $10.5 million a year ago, and by 57.1% from $14.6 million sequentially. On a percentage basis, operating margin was 6.4%, up from 3.6% a year ago, and from 4.7% sequentially. The operating is at the low end of our target model.

Net income was $15.9 million or 4.5% of revenues, up 103% from $7.8 million a year ago, and 60.9% from $9.9 million sequentially. Our non-GAAP fully diluted EPS was $0.35 per share, up from $0.18 per share a year ago, and from $0.22 per share sequentially. The number of fully diluted shares used in the second quarter was 46,022,000.

The tax rate in the second quarter on a non-GAAP basis was 30.5%, compared to 24.5% a year ago, and 31.7% sequentially. The rate was lower than last quarter due to the release of tax liability. We expect the effective tax rate on a non-GAAP basis to be approximately 31.8% for the third quarter, which is up from negative 23.1% in the same quarter last year. The increase reflects the reinstatement of the R&D tax credit in March of 2013, and the release of tax liability last year.

Turning to the balance sheet on a sequential basis, slide 12. Cash and cash equivalents and short- and long-term investments were $92.6 million, down $21.6 million from $114.2 million in the prior quarter, and up $1.5 million from $91.1 million in the same quarter last year. In the second quarter, free cash flow was a negative $31.9 million, primarily due to the purchases of 36 acres of property in San Jose, California, for $30.2 million.

Slide 13. Accounts receivable increased by $27.1 million to $161.2 million, due to record revenues mentioned above. DSOs was 38 days, a decrease of 4 days from 42 days in the prior quarter. Inventory increased by $36.6 million to $290.9 million to support the Lunar New Year holiday shutdown in Asia. Days in inventory decreased by 6 days to 83 days. Accounts payable increased by $40.1 million to $205.8 million due to the increase in inventory mentioned above. Days payable outstanding decreased by 2 days to 57 days.

Overall, cash converted on cycle days was 64 days, a decrease of 8 days from 72 days in the prior quarter.

Now for a few comments on our outlook. During the second quarter, we saw a seasonally strong quarter in which we continued to grow at multiples of the industry, driven by the foundation of investments we have made in the past in our technology and infrastructure. As we enter the third quarter, which is a seasonally weak quarter for the industry, we look to further take advantage of the foundation we have built to continue to drive our growth.

Therefore, the Company currently expects net sales for the quarter ending March 31, 2014, in a range of $320 million to $350 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.24 to $0.30 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 a portion thereof, at any time.

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

Thank you, Howard. Again, last quarter was a record quarter of revenue and earnings for Super Micro, providing that Super Micro is leading server, storage, and embedded a solution company, and a strong competitor. We believe that we are well-positioned for a very strong calendar year 2014, and possibly reaching the $2 billion run rate very soon.

Operator, at this time we are ready for questions.

(Operator Instructions). Mark Kelleher, D.A. Davidson.

Great. Thanks for taking the questions. Congrats on a great quarter there, guys. Wanted to talk about Ivy Bridge contribution in the quarter. Can you quantify how strong that was in the quarter? Can you quantify where we are in that product cycle, and how that should roll out over the next couple of quarters?

Yes, Ivy Bridge is still a pretty new product. Again, just available for about 1.5 quarters. And quarter-to-quarter, we grew about 70% for Ivy Bridge.

Oh, as far as -- yes. Of volume.

So a kind of a new product; so I believe we are continuing to grow.

Okay. And I'll make my follow-up question kind of unrelated. The competitive landscape, clearly you are growing faster than just about every other vendor out there. How do you think that landscape might change if IBM were to divest their x86 business, as was rumored today?

Yes, for sure, the market is tough, and that's why we have spent a lot of effort to build our foundation in terms of engineering capability; in terms of global operation [coast]; and all our growth investment we did heavily in the last three years have been pretty ready. And that's why we started to see the advantage to grow stronger than others.

Okay. Thanks.

Aaron Rakers, Stifel Nicolaus.

Yes, thank you for the taking the question, and then also congratulations on the quarter. I'd like to talk a little bit about gross margin, some of the levers that you still see in front of you. I guess starting with where you stand today on the Taiwan facility, in terms of utilization and where we expect that to be trending out over the next couple of quarters. And then on top of that, just remind us again of what other levers you have to attaining your target model.

Yes, Aaron, this is Howard. With regards to the utilization on Taiwan, that one stood at about 41% for the December quarter, and growing. Obviously, it's a record for us. Previous record for us was about 36%. So that's one of the levers we've talked about with investors all the way along, as far as increasing the utilization for not only the Taiwan facility, but obviously our operations worldwide. So that's one of the important levers for our gross margins.

We also hit a couple of other levers that we've talked about in the past -- product mix; as we drive more toward complete service solutions would be beneficial to our margins. Growing our scale of business; again, that contributed during the quarter to the improvement in margins. And, to a lesser extent, we talked about software and support services. And I'm glad to see that that's starting to contribute a little -- albeit little -- but just starting to contribute for us. So the levers that we've talked about in the past, it's quite gratifying to see some real numbers coming behind.

Yes, actually our all FatTwin pretty still -- about one-year-old, new product -- continues to grow strongly. And we just announced our TwinPro, which is another [kind of] performance per watt, enhanced, Twin architecture. And just ramping up now quickly, and followed by our MicroBlade in the next few months. So, the new product, new architecture, outperform competition (inaudible).

Okay. And then as a follow-up, I'd like to maybe understand a little bit better -- your Asia-Pac growth, in particular, was obviously notably impressive this quarter, especially in the context of what IBM has just reported tonight. Can you talk about your exposure in Asia-Pac, and in particular your positioning -- how meaningful China is in your positioning, specifically within China?

Yes, Asia is a relatively new market to us. We started to focus on Asia aggressively about 2 to 3 years ago, and now we have -- getting a stronger foundation there, especially [as that is ready] in Taiwan. So, we continue gaining good customers in both China, Japan, and Korea. So that's a very solid trend to go, I believe.

And how big is China of Asia-Pac? Can you help us understand that?

It's still roughly a majority of the Asia-Pac area.

Okay. I'll get back in queue. Thank you.

(Operator Instructions). Glenn Hanus, Needham.

Good afternoon. Your Internet data center business was up strongly. Can you talk about what the trend -- what was behind the trend there this quarter, and maybe what to expect over the next few quarters?

Yes, I guess the major reason because our capacity and logistics global have been getting very strong. So we are much more ready to approach those huge data centers now. So I believe we are continually growing in that territory quickly.

So, was some of the data center wins over in Asia -- or can you characterize, maybe geographically, where the growth really came from this quarter? And was it -- is highly concentrated in a couple of large deals?

Glenn, this is Howard. With regards to where it was, it was -- we saw some nice deals in Asia. That growth, some of the percentage is in Asia up during the quarter. We also saw some continued growth in the US, which was nice to see also.

And Europe as well.

And Europe, yes.

And what's your outlook for the next few quarters there?

I guess we will continue evenly growing, although Asia will be -- it'd be faster.

Okay, thank you.

And it appears there are no further questions at this time, so I will turn the conference back over to our presenters for any additional or closing remarks.

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

Thank you, ladies and gentlemen, and that does conclude the Super Micro second-quarter fiscal year 2014 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.