超微電腦 (SMCI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. third-quarter fiscal 2014 conference call. The Company's news release earlier today is available from its website at www.supermicro.com.

During today's call, the Company will refer to a slide presentation that it has made available to participants, which may 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, April 22, 2014. A replay of the call will be accessible until midnight May 6 by dialing 877-870-5176 and entering conference ID 6828329. International callers should dial 1-858-384-5517.

With us today our 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 and financial results for the third quarter fiscal year 2014, which ended March 31, 2014. By now you should've 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 2. Before we start, I will remind you that our remarks included 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 of Super Micro's website. 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 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 third fiscal quarter. We are pleased that the third-quarter revenue was $373.8 million. It is 4.9% higher quarter-over-quarter, and 34.4% higher year-over-year.

Non-GAAP net income was $17.8 million or 11.8% higher quarter-over-quarter and 77.1% higher compared to last year. Super Micro's non-GAAP earnings per share was $0.37 per diluted share compared to $0.35 last quarter and $0.23 last year.

Slide 5, please. Super Micro's third quarter was second straight quarter of record highs for revenue and earnings. We are especially pleased that we achieved this exceptional revenue growth during a seasonally weak quarter. We grew again in multiples of the industry growth story, expanded market share and continued to lead the industry in system architectural and solution innovation, as well as time to market.

Geography (inaudible), the revenue in North America was 54.5%, Europe was 21.7%, and Asia was 21% of total sales. Most of our revenue gross come from North America last quarter and was the strongest region, while Europe and Asia follow a seasonal trend. As we said last quarter, our strong foundation in product innovation and global operations prepare Super Micro to be up sales momentum in 2014.

Our services contributed 50.1% of our total revenue. It is the first time ever in Super Micro history that more than 50% of our sales come from computer systems. Computer server revenue mostly come from our OEM and direct customers, which accounted for 48.1%, and 15.9% from cloud and Internet data centers. More and more of our customers understand that computer systems and solutions from Super Micro brings more value to their business.

The systems have been optimized for performance, power efficiency and reliability with our [approved] component, unique [meditation] and strict (inaudible) procedures, for higher product quality and quicker (inaudible).

Now let me bring you up to date on server [other business] progress. First, (inaudible) Ivy Bridge product shipments increased 32% quarter-over-quarter as it continued to ramp. It is still in the ramp cycle for Ivy Bridge, and we expect that this technology transition will continue through 2014.

Second, our Asia operation utilization rate is about 50% now, and is continuously growing. We hope to reach 100% capacity within 12 months while we continue speeding up our business growth in Asia. Moreover, we have just started to use our newly acquired green computing park in Silicon Valley. In our facility, we will provide immediate and additional operation resources to serve our faster growing domestic market.

Slide 6, please. The results this quarter indicated that our products and service continued to expand their leadership position. Let me provide some more highlights of specific products and services. We have been providing some select customers with total solutions, including hardware computer systems, processor server management, and application software for a few quarters.

As a result, more customers now can depend on Super Micro to deliver end-to-end complete solutions such as the [high available] (inaudible) cloud serve, Hadoop for cloud environment, which are additional applications and more. In addition, we recently launched our on-site service program to complement our total solutions. It will provide a (inaudible) support with 4 hour and/or next business day on-site service. The rapidly growing service program is further strengthened with our [FAE] force. And we have seen excellent response from customers for these new business solutions.

By expanding our business model to provide a total solution and service, many new doors of opportunity have opened for Super Micro, and we expect them to drive a more direct (inaudible) business globally.

Slide 7, please. On our hardware side, our twin family grew strongly last quarter, with FatTwin leading the way with over 20% growth year-over-year. The FatTwin platform available in more than 15 models and more than 40 combinations is the most versatile multipurpose server architecture on the market, optimized for high-volume data center deployment.

We also saw strong growth in our other Twin product lines, including our recently launched TwinPro series. The TwinPro is the only solution on the market today that offers both SAS3.0 and NVMe storage options, boosting our performance edge over competition. The Twin family makes up the largest product line in our [recommended] solutions, which was up 50% year-over-year.

On other system solutions storage end, GPU/Xeon Phi product lines have grown consistently with 32% and 42% year-over-year growth, respectively. Also we have provided a variety of storage and edge PC solutions to many partners. We also getting a lot of interest from our recently launch of high-density, low-power MicroBlade architecture. They support up to 112 nodes Atom or 28 nodes [BPGO] in a 6U form factor. It features up to 4 [elements], 2.5 gigabits per second SDN, a software defined networking switch, with the 10 gigabits per second switch version coming soon.

Our extremely power and cost-efficient MicroBlade architecture with the highly dynamic SDN switch will play an important role in our revenue stream for the coming quarters. Looking ahead, we are consistently creating new and exciting products as we are one of the premier innovators on the market.

With our new software products and service offering, we are getting much stronger to provide optimized computer solutions to enterprise customers. Product development and innovation of next-generation server storage and networking products is well underway.

We are also executing to launch a brand-new system architecture that will further optimize the system for today's virtualization and cloud applications. Now is definitely an inspiring time for us and our customers, as we stand at a different age of technology.

In summary, Super Micro had a second straight quarter of record revenue and earnings. As I have said before, our operation investment in global foundation and strong product development enables Super Micro to achieve much higher revenue, profitability and momentum in 2014. We are off to a great start for calendar 2014, and we are focused on reaching a $2 billion run rate target.

For more specifics on the third quarter, let me turn it over to Howard.

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

Let me begin with the review of the third- quarter income statement. Please turn to slide 8. Revenue was a record $373.8 million, up 34.4% from the same quarter a year ago, and up 4.9% sequentially. The increase in revenue from last year was primarily due to our increase in server solutions sales, particularly in the Internet data center customer.

We are also benefiting from the technology transition to Ivy Bridge, as well as new offerings of FatTwin, storage and GPU/Xeon Phi-based solutions. On a geographical basis we had strong growth around the world, with Asia leading the way. The sequential increase in revenues was primarily due to the strength in the US, in particular in the Internet data center customers. Asia and Europe were down on a seasonal basis.

The strength of our innovation, innovative and broad solutions, and the ramping of a technology refresh cycle outweigh for us what is traditionally a seasonally weak quarter for the industry.

Slide 9. Turning to product mix. The proportion of revenues from server systems was 50.1% of total revenues, which was up from 41.8% the same quarter a year ago and from 48.8% last quarter. ASPs for servers was $2600 per unit, which is up from $2100 last year and down from $2700 last quarter. We shipped approximately 72,000 servers in the third quarter and $1,116,000 subsystems and accessories.

We continue to maintain a diverse revenue base with over 700 customers, and none of these customers representing more than 10% of our quarterly revenue. Internet data center revenues was 15.9%, which was an increase from 12.9% in the prior quarter and from 10.8% in the prior year. The increase was primarily in the US, as we benefited from the expansion of the cloud and those looking for optimized solutions. 54.5% of our revenues came from the US and 51.9% from distributors and resellers.

Slide 10. Non-GAAP gross profit was $57.5 million, up 47% from $39.1 million in the same quarter last year, and up 3.9% from $55.3 million sequentially. On a percentage basis, gross margin was 15.4%, up from 14.1% a year ago, and down from 15.5% sequentially. Price changes from Ablecom resulted in no basis point change to gross profit in the quarter, with total purchases representing approximately 14.4% of total cost of goods sold, compared to 18.7% a year ago and 18.1% sequentially. The year-over-year increase in gross margin resulted from stronger vendor relationships, increased utilization of the Taiwan facility, offset in part by higher Internet data center sales.

Sequentially, gross margins were down due to a seasonally weak quarter for the industry and higher Internet data center sales, offset in part by higher utilization of our facilities, more complete service solutions, and increased purchasing power.

Slide 11 and 12. Operating expenses were $33.2 million, up from $30.8 million for the same quarter a year ago, and from $32.3 million sequentially. The percentage of revenues operating expenses was 8.9%, down from 11.1% year-over-year and from 9.1% 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 development of our solutions. Sequentially, operating expenses were higher due to trade show expenses associated with [FBIT], as well as higher personnel expenses due to the additional R&D resources. The Company's headcount increased by 60 sequentially to 1721 total employees.

We continue to focus on leveraging the investments we have made in our infrastructure, while still making strategic investments in our solutions portfolio.

Operating profit was $24.3 million, up 192.9% from $8.3 million a year ago, and by 5.6% from $23 million sequentially. On a percentage basis, operating margin was 6.5%, up from 3% a year ago and from 6.4% sequentially.

Net income was $17.8 million or 4.8% of revenues, up 77.1% from $10 million a year ago and 11.8% from $15.9 million sequentially. Our non-GAAP fully diluted EPS was $0.37 per share, up from $0.23 per share a year ago and up from $0.35 per share sequentially. The number of fully diluted shares used in the third quarter was 48,103,000 shares.

The tax rate for the third quarter on a non-GAAP basis was 26.4%, compared to negative 23.1% a year ago and 30.5% sequentially. The rate was lower than last quarter due to the release of tax liabilities in the current quarter. We expect the effective tax rate on a non-GAAP basis to be approximately 31% for the fourth quarter, which is up from 24.7% in the same quarter last year. That increase reflects the reinstatement of the R&D tax credit in June of 2013, and the release of tax liability last year.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents in short and long-term investments were $104.4 million, up $11.8 million from $92.6 million in the prior quarter, and up $7.7 million from $96.7 million in the same quarter last year.

In the third quarter, free cash flow was a negative $8.7 million, primarily due to the increase in accounts receivable to support the growth of revenue.

Slide 14. Accounts receivable increased by $20.9 million to $182 million, due to record revenues mentioned above. DSOs was 41 days, an increase of 3 days from 38 days in the prior quarter. Inventory increased by $4.2 million to $295.1 million, to support the increase in forecasted revenues for a seasonally strong fourth quarter. Days in inventory was the same at 83 days.

Accounts payable was $205.2 million, which was comparable to the prior quarter. Days payable outstanding increased by 1 day to 58 days. Overall cash conversion cycle days was 66 days, an increase of 2 days from 64 days in the prior quarter.

Now for a few comments on our outlook. During the third quarter, we grew in a seasonally weak quarter for the industry due to our optimized solutions and leveraging the foundation we have built over the past few years. As we enter the fourth quarter, which is seasonally a strong quarter for the industry, we continue to leverage the foundation we have built to continue to drive our growth and profitability.

Therefore, the Company currently expects net sales for the quarter ending June 30, 2014, in a range of $370 million to $410 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.35 to $0.41 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 it back to Charles for some closing remarks.

Thank you, Howard. Again, last quarter was another record high quarter of revenues and earnings for Super Micro, and it is a strong start to calendar 2014. With our leadership in innovation and time to market, together with our strong global capability growth, I am confident that calendar 2014 will be a significant year of revolution and growth for Super Micro.

Operator, at this time we are ready for questions.

(Operator Instructions). Aaron Rakers, Stifel.

Yes, thanks for taking the questions. Congratulations on another solid quarter. I guess the first question, and then I have a follow-up, is on the gross margin line. When I look at the 15.4% gross margin that you guys just reported, obviously you saw record high contribution from your total systems revenue which typically would help that gross margin line.

So I think -- could you guys give us some color on the various different puts and takes, particularly the mix of Internet data center vertical, and how that impacts that weighted gross margin relative to the mix of the total systems business increasing?

Yes, thank you for the question. Indeed, recently our operation in Asia is ready and strong. And that is why we start to get into more aggressive in cloud and Internet data centers. So basically, we gain pretty much one in US, one new in Asia, and another one new in Europe.

So those high-scale data centers and Internet business kind of good for our long-term. And short-term, yes, we kind of had to sacrifice our profit a little bit. But long-term, we will get a benefit from this incremental scale.

I guess just to kind of follow up on that then, is there any kind of help that you can give us with regard to the differential between the gross margin of that Internet data center vertical, as that seems to be obviously a growth driver here as we continue to move forward, relative to I guess you'd call it the traditional enterprise business, the non-internet data center vertical?

Indeed, we are also growing very strong in the traditional enterprise market, especially now our on-site service is fully available and our management is always available. So we are also growing (inaudible) in enterprise customers, and that is why our overall profit margin won't be too bad, I mean.

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

Mark Kelleher, D.A. Davidson.

Thanks for taking the question. Can you guys hear me?

Yes, we can.

Okay, just wanted to follow-up on that question. I'm going to ask kind of the same question in a different way. You've in the past had some gross margin expectations. Should we look at sort of the gross margin sort of plateauing here as the increase in data center continues to take more as a percentage of revenue? What are the longer-term gross margin expectations right now?

I guess the most important is that we like to make sure our net profit continues to grow strongly. And with that, we are selectively [accept some huge accounts] with relatively lower margin. Howard, maybe you can add something?

Yes, Mark, this is Howard. Also, again, we are still holding to our target. We are driving toward that. And quite frankly, like I said, we always said that it wouldn't happen in a linear fashion per se. And you have to remember that this is a seasonally weak quarter. If you look back historically, you will find that there is always some margin pressure during the March quarter if you go back a couple of years.

Okay. And as a follow-up question, how about an update on the Taiwan manufacturing? Where are we in utilization there, and are you going to want to put another line there?

You know, we are kind of pleased. It is still behind schedule. We are kind of pleased. As Charles mentioned, it is over 50% of our utilization at this point. We are looking to drive and keep on filling up that facility and utilize the benefits it is providing to us.

And we believe within one year, our utilization in Taiwan facility should be almost 100%. So that is a pretty positive site to us.

Okay, great. Congratulations again on the quarter.

Thank you.

Glenn Hanus, Needham & Company.

Good afternoon. So on the revenue, you did roughly $40 million of revenue upside in the quarter. Can you give us a little more color where that upside come from? Obviously, North America was strong, Internet data center. Did you maybe have -- it sounds like you have a couple of new large customers. You know, a little more color on that.

And then on the guide, I mean it is certainly good guidance, but seasonally you might have stronger sequential growth into the June quarter. So was there some revenue perhaps that went into March, did a deal or two or something, and then is a little less in June; can you give us some color around that?

Yes. Basically, as you know, June traditionally our strong quarter, and this year I believe will be similar. So (inaudible), again, that is why I say we start to be more aggressive in some [thick cloud] Internet data center. However, we are also growing stronger in enterprise accounts. So overall, our profit margin should be consistently improving.

All right, I will take it up offline. All right, thank you very much.

Thank you.

And this does conclude the question-and- answer session of our conference call. I would like to turn the conference back to Mr. Liang for 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. That does conclude this Super Micro third-quarter fiscal year 2014 conference call. We do appreciate your participation. You may disconnect at this time.