超微電腦 (SMCI) 2014 Q4 法說會逐字稿

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Fourth Quarter and Full 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 assessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

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

As a reminder, this call is being recorded Tuesday, August 5, 2014. A replay of this call will be accessible until midnight, August 19, by dialing 1-877-870-5176 and entering conference ID number 6112672. 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 fourth quarter and full fiscal year 2014 which ended June 30, 2014.

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 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 th3se 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 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 our fiscal fourth quarter.

We are pleased that our fourth-quarter revenue was $428.1 million. It's 14.5% higher quarter over quarter and 32.8% higher year over year. This (inaudible) was a record high for Super Micro.

Non-GAAP net income was $19.4 million, or 9.2% higher quarter over quarter and 71.8% higher compared to last year.

Super Micro's non-GAAP earnings per share was $0.40 per diluted share compared to $0.37 last quarter or $0.26 last year. Slide 5 please.

In my comments today, I would like to discuss our results last quarter, as well as our achievements during the past fiscal year.

Last year, we achieved record-high revenue, which was 32.8% higher than last year. This strong fourth-quarter performance helped to push our full-year revenue to $1.47 billion, representing 26.2% growth over last year. This quarter also marks the third quarter in a row of record revenue which demonstrates significant momentum in our growth trend.

This strong upward momentum is the highest in the industry, where our growth rate is a multiple times that of the industry's. It also indicates that we continue to take market share.

More than ever, our partners choose our platform system solutions due to quality and performance optimization. Last quarter, our service system contributed 55.2% of our total revenue, which is a record high for system growth. Of that, 48.1% of our business last quarter came from OEMs and direct customers. Cloud and Internet Data Center accounted for 17.8% of sales, which is an increase of 150% over last year and approximately 28% higher than last quarter. Indeed, these results indicate that we have been able to win the opportunities in this competitive market with optimized products.

Geographically, revenue in North America was 58.6%, Asia was 19.6%, and Europe was 18.5% of total sales. Our growth in North America continued to be strong and very consistent due to our improved economical scale, [TCO] Data Center Optimized product line and sales folks on our key market segment in the US. We also see a strong growth trend in storage virtualization, cloud and internet data center demands.

Asia business improved from last quarter, mainly due to stronger growth in China, and our Taiwan facility is about 50% utilized and increasing.

As for products, storage had been the consistent strong product line for all fiscal 2014. We have very strong storage product line, and we have many partners who have leading software -- storage software solutions that run Super Micro system products. Last quarter, our storage revenue grew 54% year over year and 27% sequentially, which accounts to about 10% of our total revenue this past year. GPU solutions were also strong and continue with 75% higher growth year over year and 13% higher sequentially. Our FatTwin product line has been the strongest, with over 150% higher revenue than last year and 107% higher sequentially. Slide 6 please.

2014 has been the year of remarkable revenue growth, product innovation, foundation improvement and (inaudible) capacity. It was a breakout year in revenue for Super Micro with annual growth of 26%, mainly due to strong products optimized for storage, HPC, virtualization, cloud and data center. Our server (inaudible) provide a (inaudible) solution that is optimized for application for power-saving, for (inaudible) and for (inaudible). Super Micro grows faster than the industry because we are the only player in the industry that had widest array of (inaudible) product to deliver the best, and it's actually what the industry wants.

Whether our product is in the Super Micro branded product or presented in the name of our partner, Super Micro is the leader in application optimization.

In 2014, our product innovation and (inaudible) were the most extensive in the world. We upgraded our Twin product line with the TwinPro architecture (inaudible) SAS 3.0 storage. NVMe (inaudible) PCI-E SSD and titanium level efficiency power supply in the Data Center Optimized platform. We continue to extend the application-optimized SKU for our FatTwin architecture. We extended our leadership for high-density microserver solutions by launching our 24-node 3U Micro Cloud for data center, web hosting and cloud application.

We also launched the industry's fastest server, the MicroBlade with the 112-node Atom or [20]-node [DPGO] in the 6U form factor.

Lastly, our GPU solutions were number one in the Green500's (inaudible) Computer Rankings for being the most powerful and the most power-efficient.

Our rapid growth in 2014 was also enabled by the improvement of our global foundation. Our Asias lines in Technology Park in Taiwan supports our Asia and European sales (inaudible) much quicker than before.

On our domestic front, we have purchased a new 36-acre land with a 300,000-square-feet building within 5 minutes from our current campus. We are converting the existing building on a new purchase to logistics and system integration for [CDTs], and they are about ready to [deploy]. This additional facility will enable us to speed up our business growth in North America, and in the next few years, we will develop this land into one of the biggest IT research and (inaudible) for [CDTs] in the US. We call this new campus the Super Micro Green Park. Page 7 please.

Looking ahead, Intel will launch our new process technology, Haswell in September. We have been working on our early (inaudible) program with key customers for the past few months, and we are well prepared. Our X10, the industry's strongest server storage product lines. They are fully-optimized for a new processor. In fact, we have been successfully deploying thousands of these new X10 systems to early adopters (inaudible) Intel early shipping program. Most importantly, we will again be the industry leader in terms of (inaudible) innovation with the leading come-to-market advantage.

They are the core strengths of Super Micro, and we expect to exploit this opportunity to its max. To further explore this technology transition, we are also ready to deliver a new server architecture that we called the Ultra. The Ultra architecture, as its name suggests, is a server architecture that delivers the highest of performance and the most flexibility than any other servers on the market today. We have removed the traditional IO rigidity and [bottlenecks] by developing a set of new multi-function IO modules. This allows us to have a much higher performance on various networking and storage solutions. Moreover, the Ultra architecture features a unique design which achieves much impressive PUE performance with the (inaudible) need to operate most high-performance system (inaudible). Ultra architecture's [competitive] features will set Super Micro apart from its competition when we -- when our new generation of server hit the market this quarter.

As we get into fiscal 2015, we are more excited than ever before. We see a great opportunity to speed up our growth momentum and reach that $2-billion annual run rate this year. Our foundation continues to get stronger as we start to utilize our Green Computing Park space and Taiwan facility for higher operation capacity and efficiency. Together, we (inaudible) upcoming Haswell base that will launch with, yet again, the first-to-market advantage. We are certain our business will dip into the next level in the very near future.

For more specifics on the fourth 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 a review of the fourth-quarter income statement. Please turn to Slide 8.

Revenue was a record $428.1 million, up 32.8% from the same quarter a year ago and 14.53% sequentially. The increase in revenue from last year was primarily due to our increase in server solution sales, particularly in our cloud internet data center customers. Storage and FatTwin continue to benefit from the market's desire for more dense and power-efficient solutions. More [importantly], as our solutions become more complex, the value of our engineering and the optimized solutions we can create from our building block approach is continuing to gain momentum.

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 our strength in the US, in particular in the cloud internet data center customers. Asia continued to grow while Europe was down. The strength of our innovative and broad solutions, coupled with our strong engineering, continue to draw more customers looking for help in bringing the best solutions to fit their needs. Slide 9.

Turning to product mix, the proportion of revenues from server systems was 55.2% of total revenues, which was up from 47.4% the same quarter a year ago, and from 50.1% last quarter. ASP per server was $3,300 per unit, which is up from $2,400 last year, and up from $2,600 last quarter. We shipped approximately 72,000 servers in the fourth quarter and 1,114,000 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 revenues. Cloud internet data center revenues was 17.8%, which was an increase from 15.9% in the prior quarter, and from 9.5% in the prior year. The increase was primarily in the US, as we benefit from the expansion of the cloud and those looking for optimized solutions. 58.6% of our revenues came from the US, and 51.9% from our distributors and resellers. Slide 10.

Non-GAAP gross profit was $66.6 million, up 43.9% from $46.3 million in the same quarter last year, and up 15.8% from $57.5 million sequentially. On a percentage basis, gross margin was 15.6%, up from 14.4% a year ago, and from 15.4% sequentially. Price changes from (inaudible) resulted in no basis points charge to gross profit in the quarter, with total purchases representing 15.7% of total cost of goods sold, compared to 17 a year ago, and 14.4% sequentially.

The year-over-year increase in gross margin resulted from strong vendor relationships, increased utilization of our Taiwan facility, offset in part by higher cloud internet data center sales. Sequentially, gross margins were up due to more complete server solutions and increased purchasing power, offset in part by higher cloud internet data center sales. Slide 11 and 12.

Operating expenses were $37.2 million, up from $31.2 million in the same quarter a year ago, and from $33.2 million sequentially. As a percentage of revenue, operating expense was 8.7%, down from 9.7% year over year, and from 8.9% 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 broadening of our solutions. Sequentially, operating expenses were higher due to higher personnel expenses for additional R&D resources, as well as product development expenses as we prepare for the transition to Grantley.

The Company's headcount increased by 148 sequentially to 1,869total employees.

Operating profit was $29.4 million, up by 94.5% from $15.1 million a year ago, and by 21.2% from $24.3 million sequentially. On a percentage basis, operating margin was 6.9%, up from 4.7% a year ago, and from 6.5% sequentially. We continue to focus on leveraging the investments we have made in our infrastructure while still making strategic investment in our solution portfolio to drive our operating margins and profits.

Net income was $19.4 million, or 4.5% of revenue, up 71.8% from $11.3 million a year ago, and 9.2% from $17.8 million sequentially. Our non-GAAP fully-diluted EPS was $0.40 per share, up from $0.26 per share a year ago, and up from $0.37 per share sequentially. The number of fully-diluted shares used in the fourth quarter was 48,977,000.

The tax rate in the fourth quarter on a non-GAAP basis was 33.6%, compared to 24.7% a year ago, and 26.4% sequentially. The rate was higher than last quarter due to additional tax liability associated with R&D expenses in the current quarter, as well as higher profits. We expect the effective tax rate on a non-GAAP basis to be approximately 35.1% for the first quarter, which is up from 31.7% in the same quarter last year. The increase from last year reflects the reinstatement of the R&D tax credit in June of 2013, and the release of tax liabilities in that quarter. The R&D tax credit has not been reinstated as of yet, which we have estimated to have caused about 2.2% reduction in our tax estimated current rate. In addition, if the tax credit is reinstated retroactively like it has in the past, we will have about an about 1.2% reduction in our overall annual tax rate. This effectively reduces the tax rate on an annual basis to about 31.7%. Other items such as the lapse of statute of limitations and an increase or decrease in profits have affected our tax rate as well in the past.

Our non-GAAP tax rate for fiscal 2014 was 30.6%. The Company continues to work on our tax planning as we expand overseas.

Turning to the balance sheet on a sequential basis, Slide 13. Cash and cash equivalents and short- and long-term investments were $99.6 million, down $4.8 million from $104.4 million in the prior quarter, and up $3.9 million from $95.7 million in the same quarter last year. In the fourth quarter, free cash flow was a negative $9.7 million, primarily due to an increase in accounts receivable and inventory to support continued growth of the revenue. Slide 14.

Accounts receivable increased by $30.7 million to $212.7 million due to record revenues mentioned above. DSOs was 42 days, an increase of 1 day from 41 days in the prior quarter. Inventory increased by $20.7 million to $315.8 million to support the forecasted revenue and a transition to Grantley-based products. Days in inventory was 77, a decrease of 6 days from 83 days in the prior quarter. Accounts payable was $219.4 million, which was 53 days, a decrease of 5 days from 58 days in the prior quarter.

Overall, cash conversion cycle days was 66 days, which is the same as the prior quarter.

Now for a few comments on our outlook.

During the fourth quarter, we continued our growth, leveraging a foundation in product, engineering and delivery we have built over the past few years to provide optimized solutions to our customers. As we enter the first quarter, which is a seasonally weak quarter for the industry, we look to take advantage of our time to market by providing

the broadest breadth of solutions as a new technology refresh cycle is about to start to continue to drive our growth and profitability.

Therefore, the Company currently expects net sales for the quarter ending September 30, 2014, in a range of $395 million to $435 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.36 to $0.42 for the quarter. At the midpoint, this would represent a growth of 34% and 77% in revenue and EPS, respectively, from the prior year. 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.

Charles Liang: Thank you, Howard.

The fourth quarter was a record high for Super Micro, with growth at 26.2% higher year over year, and that outpaced more than four times the industry's growth rate. We start a new fiscal year with the strongest product line in our history, and with our global foundation and operation ready for a big jump. I'm fully confident that 2015 will be a breakthrough year for Super Micro.

Operator, at this time we are ready for questions.

Thank you, sir. (Operator Instructions) And we will go first to Aaron Rakers with Stifel.

Yes. Thanks for taking the question and congratulations on the good results. The first question, if I can, just talk a little bit about the internet data center vertical. I know you guys talk about there not being any kind of 10% customers in total, but maybe you can address whether or not there's any kind of customer concentration dynamics to that vertical and kind of dovetailing that with the fact that I think last quarter you had talked about, in particular, three new large data center opportunities that you had won. Where do we stand in terms of the progression of those opportunities in terms of the results that you just reported?

Yes. Thank you, Aaron. A very good question. Yes, most of our customers continue to buy more product from us, but at the same time, we are also growing our overall revenue. So I (inaudible) say, we will grow more large customer and at the same time grow -- each customer will grow.

Adding to that, Aaron, as I mentioned, we had no 10% customers. That vertical is going well for us, per se, and, like I said, we talked about the three data centers that we won a couple quarters ago. Those are going well for us. So there are new relationships that are doing well for us.

Okay. And then as a quick follow-up, when we look at the gross margin line, I think some investors will ask, "Why do we not maybe see a little bit more leverage there, given the strong systems mix?" Can you talk about the puts and takes relative to the gross margin, be it the mix relative to systems versus the components business and how much of an offset we should consider that internet data center piece of that as that grows going forward in terms of maybe a downward pressure point on gross margin?

Yes, Aaron. I think, like I said, while the mix of internet data center business went up to 17.8% this quarter from last quarter, I think you'll see that our gross margins overall increased. And I think we've been saying all along that it's important for us to be in that internet data center vertical because, while it is competitive, it helps us increase our purchasing power. So that -- if you can take a look at an example, that more than offset any of the downward pressure that we had during that quarter because it really reflects onto the rest of our business as far as that purchasing power.

Great. I'll jump back in queue. Thank you.

And we'll go next to Mark Kelleher with D.A. Davidson.

Great. Thanks for taking the question and let me add my congratulations as well. Very good quarter. Just to follow up on Aaron's question, where do you think those gross margins can go? There were a number of levers that were working in your favor in that quarter. We talked about the server mix up, but the ASPs were up, the Taiwan manufacturing was doing very well. So there's a number of things coming into play here. Where do you think the gross margins can trend over time?

Yes. I believe there still has a lot of room for us to grow gross margins. For example, our Asia facility today [the utilization growing] is only about 50%. And we see it will continue to grow strongly. Similar, we just purchased (inaudible) campus -- 36 acres. We just started use of that new facility. So we already paid our facility and we just start to use the facility. Again, the utilization rate will continue to grow as well. So all of those will help us. By the way, new Intel Grantley platform -- as you know, we always have a time-to-market advantage. And we already shipped thousands of systems to early (inaudible) customers, and during this month, next month, we'll ship kind of pretty good volume [of] early deployment (inaudible). So all of those will help us in the gross margin and revenue.

So I know, Howard, you've, in the past, given us kind of a range. Can we do 16%, 17%? 17%, 18%? 15%, 16%? Where would you peg it?

We've kept the range the same, Mark. Right now, it's 16% to 18%. We think we have some great opportunities. We'll keep that range, but also we have some great opportunities to grow our business, as we talked about and Charles talked about.

Alright. Just kind of as a follow-up to that. Your ASPs on those servers jumped pretty dramatically. What's going on there?

We focus on really high-end, high-efficiency systems. For those systems (inaudible) memory in hard drive. And that may be one of our key factors. That's why our ASP grow a lot, especially virtualization. People need a huge memory in hard drive.

Okay. Great. Thanks.

(Operator Instructions) And we'll go next to Rich Kugele with Needham & Company.

Thank you. Good afternoon. Great quarter and good year. Just two questions. First, with Grantley coming occasionally ahead of these processor rollouts, you do see a pause. Clearly, you guys have not seen a pause in the previous generation. Would you expect it to be a very back-end-loaded quarter as a result of this launch or -- any updates on just linearity with the new product launch coming in September.

Yes. The new product happened very smoothly this time so far, and we already -- that's why I mentioned we already have thousands now deployed already. And many more thousands are coming this month and next month. So we do see a (inaudible) a smooth transition and the transition will be strong, we believe at this moment.

Excellent. Okay. And then lastly, on the Taiwan facility, obviously the utilization continues to improve and that's good. But Howard, just to understand the leverage in the model, can you give us a sense on what the flow-through would be on a 60%-type utilization or a 75%-type utilization rate? And is that your goal? Do you have a goal exiting fiscal '15 of what that target utilization might be?

We said in the past that we wanted to get to about 100% utilization in the next year -- that's been said before -- on the three lines we have. Remember, we have capacity for 6 to 8 lines there. So again, we have room to grow and we're looking at adding additional lines there. As far as sizing the benefit from that, again, labor costs and those types of things are about a third less than what they are here, so it can be -- we call it as one of the biggest levers for us in helping our gross margins.

Okay. Great. Thank you very much.

(Operator Instructions) And we'll go back to Aaron Rakers with Stifel.

Yes. Thanks again. So one of the opportunities that I think has presented itself to Super Micro is the pending transaction of Lenovo acquiring the IBM assets on the X86 server side. So maybe you could just update us on where you stand, whether or not you've seen any benefit that you've seen in your business from that. And in particular, maybe you could just give us a quick update of where you stand relative to traction within the traditional enterprise space for Super Micro.

Yes. It's a very good question. We (inaudible) some customers come to us because they really want the best quality and onsite service kind of capability. And naturally, we are most positive for them. So we can see some change coming and it looks like this trend will continue.

And then a final question from me. Some discussion around gross margin and leverage. Howard, I'd like to maybe understand how you think about free cash flow. What do you think the right free cash flow -- maybe better question, right working capital metrics would look like on a going-forward basis? Just any kind of framework of how you're thinking about those metrics would be helpful as it relates to that free cash flow story.

Yes. Aaron, if I look back at this past year, I guess we were fairly good at managing our free cash flow. The only negative that we had -- I think we were about $16 million negative -- for the year or so on our free cash flow. And quite frankly, that was due to the purchase of the property that we had that we financed about half of it and we -- and then we purchased it out of cash with the rest of it. So again, that wasn't bad, given that we were able to support the growth of the business. And I think that's where our focus is going to be -- not to -- to keep leveraging the business and, quite frankly, grow our business and then reinvest that working capital -- the money that we'll be generating from our profits -- back into the business to continue this growth. That's our focus.

Okay. Thank you.

And we'll go next to Mark Kelleher with D.A. Davidson.

Yes. I just wanted to follow up on the Grantley launch. What percentage of revenue in the quarter was Ivy Bridge? Is Ivy Bridge still expanding as a percent of revenue?

Yes, Mark. Actually it grew for us about -- I think it was 17% quarter over quarter and still expanding. So still important for us going forward and we still some long life in that going forward for many quarters.

Great. So the -- my understanding is that the ramp-up of a new architecture kind of takes many quarters to happen and we shouldn't be looking for some spike because of Grantley launching in the September quarter. Is that accurate?

That's accurate.

Okay. Thanks.

And it appears at this time we have no further questions. I'd 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, ladies and gentlemen. That does conclude the Super Micro Fourth-Quarter and Full Fiscal Year 2014 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.