超微電腦 (SMCI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated First Quarter Fiscal 2015 Conference Call. The Company's news release issued earlier today is available from its website at www.supermicro.com.

In addition, during today's call, the Company will refer to a slide presentation that it has made available to participants which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

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

As a reminder, this call is being recorded Tuesday, October 21, 2014. A replay of thee call will be accessible until midnight, November 4, by dialing 1-877-870-5176 and entering conference ID number 8567910. International callers should dial 1-858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President Investor Relations.

And now I'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Good afternoon and thank you for attending Super Micro's conference call on financial results for the first quarter fiscal year 2015 which ended September 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 2014 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'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 first quarter.

We are pleased that our first-quarter revenue was $443.3 million. It's 3.6% higher quarter over quarter and 43.5% higher year over year. This result was another record high for Super Micro.

Non-GAAP net income was $23.2 million, or 19.5% higher quarter over quarter and 134.8% higher compared to last year.

Super Micro's non-GAAP earnings per share was $0.46 per diluted share, compared to $0.40 last quarter, or $0.22 last year. Please turn to Slide 5.

Last year, we achieved our fourth consecutive record-high revenue, which was 43.5% higher than last year. Many growth factors contributed to this impressive achievement. First and foremost, our server systems contributed 57.7% of our total revenue, which is another record high for our system business. 44% of our business last quarter came from our (inaudible) solution -- OEM and direct customers. Cloud solution and storage account for significant (inaudible), while internet data center (inaudible). Moreover, we introduced a brand new X10 generation of products [based on] latest Intel Haswell [DP] processors. We [excised] our engineering expertise and turned it into a first-to-market product advantage from early delivery programs.

Geographically, revenue in North America was 54.9%, Asia was 19.9%, and Europe was 20.2% of total sales. Our growth in North America continued to be strong, while Asia grew slightly and Europe [rebounds] from last quarter. Notably, we (inaudible) the green computing park project in the heart of Silicon Valley last quarter. The expansion will provide additional production and operation capacity as we expect more aggressive growth from the domestic market in the near future.

As I have mentioned before, systems solutions have grown to dominate our revenue because of our optimized design for unique customers in areas like storage, cloud, HPC and high-density multiple-node systems. Last quarter, our storage revenue grew 63% year over year and 1% sequentially. GPU/Xeon Phi solutions continued their momentum with 95% higher growth year over year and 52% higher sequentially. Multiple-node systems, such as MicroCloud, grew 60% year over year and 71% sequentially. Our Twin solutions, including FatTwin, TwinPro and Twin Squared product lines, grew 73% year over year and 23% sequentially. From those trends, we are pleased to see the performance per watt and computing density continue to (inaudible) as we anticipated. In addition, our service, software and networking solution offers are growing consistently to help us win new total solution customers. Slide 6 [please].

Continuing our momentum from our X9 generation of products, we launched our (inaudible) X10 Haswell DP product line (inaudible) this year -- Intel's (inaudible). Along with the launch, we unveiled our industry-leading brand new [Haswell] architecture which delivers the highest of performance per watt and most flexible I/O on the market today.

These [Haswell] servers can support the (inaudible) processors up to 165 watt TDP (inaudible) thermal design power, 1.5 terabytes of [CD] alpha memory intended for (inaudible), plus (inaudible) which I will discuss later, for increased storage bandwidth and energy-efficient, 96% plus [titanium] level power supplies. We removed the traditional I/O rigidity and bottlenecks by developing a set of new multiple function I/O modules that can accommodate full 10G (inaudible), full 10G (inaudible), full 40G Ethernet, multiple-channel [FBR] (inaudible) options and beyond. Also included in this launch was our (inaudible) Memory Express Technology, or called NVMe. It's the next big (inaudible) in storage performance, and Super Micro is again the first to implement this latest technology and deliver it to the market. Our testing indicates that the NVMe system provides almost 6 times the bandwidth and approximately 7 times the latency improvement over standard SSDs. Moreover, we have the most extensive hot [swappable] NVMe product lines in the industry, and we are shipping to our customers today.

As our technical expertise matured, we want to offer more value beyond just hardware systems. Many years of preparation and investment have gone into Super Micro's cloud solution business. Our cloud solutions consist of complete racks of servers, switches and storage, combined with software and service intended for both large-scale public and small-scale private clouds. These solutions are essentially plug-and-play with complete care by Super Micro, which represents our continuous effort to provide a customer with optimized, high-value turnkey solutions with peace of mind.

To summarize, we have begun fiscal 2015 with very strong first-quarter results which carries our fast-paced momentum [toward] into an exciting new year. Our strong global foundation is based on years of innovation -- innovative product leadership and expanding worldwide operations. We continue to see opportunity in the server and storage market by leveraging our unique (inaudible) approach and delivering optimized complete solutions with service and software. We believe this new enhanced business capability will (inaudible) our strong growth momentum and gain market share.

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

Thank you, Charles, and good afternoon, everyone.

I will focus my remarks on earnings, gross margins, operating expenses and similar items on a non-GAAP basis, which reflects 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 first quarter's income statement. Please turn to Slide 8.

Revenue was a record $443.3 million, up 43.5% from the same quarter a year ago and up 3.6% sequentially. The increase in revenue from last year was primarily due to our increase in server solution sales, particularly in our Twin solutions which we pioneered over 7 years ago. Storage and GPU products continue their strong growth as well.

On a geographical basis, we had strong growth around the world, with Asia again leading the way at 60.9% growth, followed by the US at 38.9% and Europe at 25.8%. The sequential increase in revenue in a seasonally weak quarter was primarily due to our strength in Europe and Asia. Our Twin products led the way, along with GPU and Micro Cloud. Slide 9.

Turning to product mix, the proportion of revenues from server systems was 57.7% of total revenues, which was up from 46.4% the same quarter a year ago, and from 55.2% last quarter. ASP per server was $3,600 per unit, which is up from $2,600 last year and up from $3,300 last quarter. We shipped approximately 71,000 servers in the first quarter and 1,254,000 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 revenue was 13.7%, which was a decrease from 17.8% in the prior quarter and an increase from 8.3% in the prior year. 54.9% of our revenues came from the US and 56% from our distributors and resellers. Slide 10.

Non-GAAP gross profit was $69.4 million, up 47.6% from $47 million in the same quarter last year, and up 4.2% from $66.6 million sequentially. On a percentage basis, gross margin was 15.7%, up from 15.2% a year ago and from 15.6% sequentially. Price changes from (inaudible) resulted in no basis-point change to the gross profit in the quarter, with total purchases representing approximately 14.5% of total cost of goods sold, compared to 17.3% a year ago and 15.7% sequentially.

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

Operating expenses were $34.8 million, up from $32.4 million in the same quarter a year ago and down from $37.2 million sequentially. As a percentage of revenue, operating expense was 7.9%, down from 10.5% year over year and from 8.7% 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 solutions. Sequentially, operating expenses were lower due to a $1.9 million of value-added tax refund from Taiwan which we received during the quarter.

The Company's headcount increased by 62 sequentially to 1,931total employees.

Operating profit was $34.6 million, up by 136.5% from $14.6 million a year ago, and by 17.6% from $29.4 million sequentially. On a percentage basis, operating margin was 7.8%, up from 4.7% a year ago and from 6.9% sequentially. We continue to focus on the many market opportunities in front of us while leveraging the investments we have made in our infrastructure to drive our operating margins and profits.

Net income was $23.2 million, or 5.2% of revenues, up 134.8% from $9.9 million a year ago, and 19.5% from $19.4 million sequentially. Our non-GAAP fully-diluted EPS was $0.46 per share, up from $0.22 per share a year ago, and up from $0.40 per share sequentially. The number of fully-diluted shares used in the first quarter was 50,305,000.

The tax rate for the first quarter on a non-GAAP basis was 32.7%, compared to 31.7% a year ago and 33.6% sequentially. The rate was lower sequentially due to an increase in profitability overseas which had the effect of lowering our overall corporate tax rate. We expect the effective tax rate on a non-GAAP basis to be approximately 33.5% for the December quarter. This rate assumes no reinstatement of the R&D tax credit.

Turning to the balance sheet on a sequential basis -- Slide 13. Cash, cash equivalents and short and long-term investments were $120.2 million, up $20.6 million from $99.6 million in the prior quarter, and up $6.1 million from $114.2 million in the same quarter last year. In the first quarter, free cash flow was a positive $24.3 million, primarily due to the increase in accounts receivable, offset in part by increase in inventory to support the continuing growth of revenue. Slide 14.

Accounts receivable decreased by $18.4 million to $194.4 million. DSOs was 42 days, which was the same in the prior quarter. Inventories increased by $25.7 million to $341.5 million to support the forecasted revenue increase and a transition to Grantley-based products. Days in inventory was 81, an increase of 4 days from 77 days in the prior quarter. Accounts payable was $222.6 million, which was 54 days, an increase of 1 day from 53 days in the prior quarter.

Overall, cash conversion cycle days was 69 days, which is 3 days higher than in the prior quarter.

Now for a few comments on our outlook.

During the first quarter, we continued our strong growth, leveraging the foundation we have built over the years and executing our strategy to provide optimized solutions to our customers. As we enter the second quarter, a new technology refresh cycle has started with many new technologies being introduced. We look to take advantage of our engineering and the broad breadth of solutions to drive our strong growth and profitability.

Therefore, the Company expects net sales for the quarter ending December 31, 2014, in a range of $440 million to $480 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.44 to $0.50 for the quarter. At the midpoint, this would represent a growth of 29% and 57% 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 first quarter was another record high for Super Micro, with growth at 43.5% higher year over year, and that again outpaced more than multiple times the industry growth rate. Through our innovative product [strategy], quality and service, we are in a unique position to take market share, grow revenue and achieve strong operating income. With that, we are on track to reach our $2-billion run rate milestone very soon.

Operator, at this time we are ready for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS.) And we'll go first to Mark Kelleher with D.A. Davidson.

Congratulations on another very strong quarter. Want to -- wanted to look at gross margins from a couple of angles. First of all, can you tell us what percent of revenue in the quarter or -- of service sales came from the Grantley launch? Is it still very small?

Mark, this is Howard. Thanks for the nice words. Yes, it's just ramping now. However, we're seeing that the ramp is probably about over 50% better than what it was when the Sandy Bridge launch occurred during similar period. (Inaudible.)

And that's carrying -- that's carrying (inaudible) gross margins. Right, Howard?

Yes.

And your tilt toward servers is a benefit to gross margins, right?

It depends on the mix of the servers. During the quarter, we had -- again, here our storage solutions were a higher mix of our products and they were more complete systems with that. So again, they can be somewhat lower at times, too. Depends on the mix of the (inaudible).

With the internet data center revenue declining as a percent of revenue in this quarter from last quarter, with Taiwan manufacturing increasing with the overall server percentage growing, and with Grantley into the mix, where can we get some more gross margin? I'm surprised gross margin didn't boost up a little bit more. What's the pullback on that? What's the offset?

So Mark, one thing you've got to remember also -- remember this is a seasonally weak quarter typically and we've gone through and grew right beyond those seasonal trends that we've had in the past. It's usually a very competitive time in the industry. So again, that's part of a -- [what you] want to call a put or take -- a take from the margin side of it. The internet data center is historically competitive for us, and that is a positive for us when it goes down. But then you've got the total server solutions mix. And quite frankly, like I said, as we ship more complete server solutions, with regards to in the storage area, they can tend to drag our margin out a little bit because of higher content of hard disk drives and other types of components.

Oh. Okay. Great. That's very helpful. Thanks. I'll get back in the queue.

(Operator Instructions.) We'll go next to Aaron Rakers with Stifel.

Yes. Thanks for taking the questions and good quarter. Going back to the gross margin discussion, it looks like, on the past 6 quarters, I think your average growth in storage has been over 40% year over year. Can you help us understand maybe that mix effect to the gross margin? How meaningful is storage today as a percentage of revenue? And is there a point in time where you start breaking that revenue stream to give more visibility to that mix dynamic?

Yes. As you know, we ship more and more storage to special OEM accounts, and at the same time, the cloud business is ramping up very well to us, including (inaudible) and those other sharing resource for private section or [all kinds] of some small public cloud. So -- and the new technology (inaudible) just mentioned -- Haswell and together with our new architecture Ultra rack and coming soon Ultra Twin -- they all contributed to higher profit margin.

Okay. And then as a follow-up, I want to go -- your Asia/Pac revenue growth was very impressive. Obviously there's been some changing dynamics in the competitive landscape with obviously Lenovo closing their transaction and then HP looking to leverage their partnership with Foxconn. Can you just remind us how meaningful China is with regards to your Asia/Pac growth and how you view the competitive landscape going forward relative to those two vendors?

Yes. They have some impact for sure. However, our growth has been getting evener in other countries like Japan, other countries in Asia, and coming -- ramping up Haswell and virtualization and total solution -- that will help us move profit margin.

Okay. And then I'll sneak one last one in. The operating expense number was quite impressive, but I think I heard you say that there was a $1.9-billion -- or $1.9-million benefit from tax. I'm assuming that that's in the G&A line. With that said, how do we think about operating expense? Is that true that that's in that G&A line and that should be adjusted? And should we use that as kind of the run rate going forward or do you expect OpEx to creep higher as we move out over the next several quarters?

Yes, Aaron. This is Howard. It was -- it's actually in the R&D line and it's a --

Okay.

$1.9-million credit that came back. It's basically a single-time item. So you would put that back into -- as you look forward -- into our numbers.

Okay. Thank you.

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

Hi. Thank you for taking the question. Actually, David Rold on for Rich. Going back to Grantley, just wanted to get a little more feedback, specifically with regard to the availability or lack thereof, I guess, of competing solutions relative to your own in the marketplace.

Yes. As you know, whenever there are new technology refresh, we have a good chance. This time, Haswell especially has a big chance to us. (Inaudible) is a new (inaudible) more challenging technology. We introduced NVMe especially (inaudible) NVMe solution provider. All of those will help us. And also, our MicroCloud -- micro (inaudible), other storage products available one by one. So all of those help.

Okay. And historically, with these new processor launches, how long is, I guess, the gap between when the new processor's released and when that becomes a majority of your shipments?

It depends. Basically, from the [Intel] (inaudible) launch day, in the 4 to 6 months -- [all a] nice period, we have growing business -- most revenue and profitability.

Okay. Alright. I'll jump back in the queue. Thank you.

Thank you.

And up next, we have Mike Staiger with Roth Capital Partners.

Hi. Good afternoon. Okay. Just wanted to get a couple thoughts on linearity, I guess, within the quarter and if you -- your success here moving forward. Should we think that linearity would change historically speaking?

Hi, Mike. Howard, and welcome on board. With regards to our linearity, it hasn't really changed. We've said we're pretty linear throughout our core, throughout our history, indicating around 30% to 30% to 40% -- some -- it's that kind of spread in our business. However, we still are a [turns] type of business.

Alright. And then just one follow-up. You have a new partnership in this EVO: RAIL and it looks like you've made a couple announcements on that. Was there any contribution in the quarter from that particular program and/or when --? Sorry.

Yes. As you know, we have a complete storage and cloud solution (inaudible) and that for sure will create a positive impact to our business. And it's happening now and we'll be gradually growing.

Okay. Thank you.

I would have to say --

Up next, we will have -- oh, sorry.

I would have to say it will take a few quarters -- (inaudible) quarter to ramp up.

Up next, we have Nehal Chokshi from The Maxim Group.

Thanks for taking my question. The 39% year-over-year growth in systems -- even when I take out the internet data center portion, which appears to account for all the direct increase, it looks like the systems grew 55% year over year. And I believe this is all channel-driven. A, is this a correct interpretation of the data? B, if so, what is driving the strong traction in the channel? Is it all product-driven or is there some increasing brand awareness that you think is driving this as well?

Nehal, this is Howard. Quite frankly, usually our server solutions go through to our direct customers and our OEM solutions customers. Again, that's where usually you see a lot of similarities to the percentages between our complete server solutions business and those other two. It goes less to the channel, although recently, again, you've seen those percentages go higher than our distributor or reseller business because the channel is now starting to begin to take our complete server solutions because, quite frankly, these systems are getting more complicated to put together, and for quality reasons and reliability reasons, they're looking for us to be putting the systems together. So I think it's a little bit of the opposite.

Okay. Okay. That's helpful. And then with data management starting to move back to internal sort of application servers, such as with the EVO: RAIL or the Nutanix or SimpliVity, is there an opportunity for Super Micro to develop some IP here or will it be Super Micro's strategy to be a partner of choice for the independent storage vendors who are seeking to move their data management stacks from external to internal to application server?

Yes. We are doing both. One is work our close partner, the other one is kind of develop some of our own IP as well.

Okay. Great. And then finally, could you talk about where's the utilization on the Taiwan facility?

About 50% now.

Still. Okay. Thank you.

Yes.

Yes, but it's (inaudible) growth basically.

Right.

Okay.

And up next, we have Aaron Rakers with Stifel.

Yes. Thanks for the quick follow-up. Two quick ones real --. First of all, you've talked about your $2-billion target the last couple of quarters now. Can you just remind us when you think you can attain that target?

I believe it's coming very soon. Maybe a quarter or a couple quarters.

Okay. And then as far as the tax rate's concerned, I know that you're guiding 33.5%, obviously not reflective of an R&D renewal.

Right.

What would that tax rate look like if we were to assume that there is a renewal and that -- if we get that some point, how do we think about the tax rate thereafter?

Well, like I said, [last time I attributed] about 4.4% to R&D coming -- the R&D tax credit coming back. So again, you'd be in the -- around 30% to -- there -- just below that.

Okay. Great. Thank you.

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 First-Quarter Fiscal Year 2015 Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.