超微電腦 (SMCI) 2015 Q2 法說會逐字稿

Good day and welcome to today's second-quarter fiscal 2015 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Perry Hayes, Senior Vice President of Investor Relations. Please go ahead, sir.

Good day, ladies and gentlemen, and thank you for joining Super Micro's second-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 prefer to a slide presentation that it has made available to participants, which can be addressed 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, January 20, 2015. A replay of the call will be accessible until midnight, February 3, by dialing 1-877-870-5176 and entering conference ID number 6183825. International callers should dial 1-858-384-5517.

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

Before we start, I will remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Supermicro'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 at Supermicro'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 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 fiscal second quarter.

We are pleased to announce that we had another record quarter, as our revenue reached $503 million. It is 13.5% higher quarter over quarter and 41.2% higher year over year. Non-GAAP net income was $33.5 million or 44.5% higher quarter over quarter and 110.9% higher compared to last year. Supermicro's non-GAAP earnings per share was $0.65 per diluted share compared to $0.46 last quarter or $0.35 last year.

Please turn to slide 5. As we have always believed, [for Washington] technology combined with the past operation from Beijing translates into strong revenue growth and increased profitability for Supermicro. Last quarter, we achieved our fifth consecutive record high in revenue. With that, we reached our goal of achieving the $2 billion annual run rate and a continued improvement of our operation profit.

Geographically, revenue in North America was 57%. Europe was 18.2%. And Asia was 15.6% of total sales. Our growth in the USA continued to be the strongest worldwide.

Last quarter, Europe grew in absolute revenue, but lower as a percentage. In Asia, we continued to see a great pressure to grow as we increase our investment in [velcro] capacity and manpower. [Last manna, la dist], we saw increasing sales in countries such as Canada, Australia, Mexico, and the region of South America, which boosted other regions' revenue to 9.2%.

Slide 6, please. For products, services have contributed 60.1% of our total revenue, which is another record high for our system business. As I have mentioned before, more and more customers make our computer systems integrated with software and management utilities offerings.

Our computer system business ensures the best quality, one-stop shop [TP] advantage as well as on-site service for customers who need them, while our [contribution] and channel business also continue to grow in revenue.

With that said, 50% of our business last quarter came from direct customers and OEMs, of which 20.3% came from the Internet data center and call providers. Cloud solution demands were not very strong last quarter.

The previous quarter was the official launch of our X10 generation of products, based on Intel's Haswell BP processors. We saw very good progress in adoption of this platform, with 269% increase quarter over quarter in X10 product shipments. The new Haswell server architecture and hot-swappable NVMe technology, among others, has strongly encouraged customers to move ahead.

While we are still in the early stages of this technology transition, our come to market application optimize architecture and performance advantages are driving this significant growth and we see this trend to continue.

On our key product line, storage continues to be a [needed] market vertical for Supermicro, with 58% gross growth year over year in addition to our traditional storage offerings. We also work with leading technology partners to provide next-generation hyper-converged storage solutions and high [speed] solutions.

When we consider the broader storage market, the share of our storage revenue is in the range of 20% of our overall business. Storage, indeed, plays an important role of our total solution [play] and we will continue to focus and invest in this growing segment.

On the computing side, we [atest] the increasing demands from cloud, enterprise, and data center industries. With our optimized (inaudible) solutions, our twin architecture, including FatTwin and Twin Pro solutions, grew 75% group year over year. We also saw approximately 50% year-over-year revenue increase with our MicroBlade, SuperBlade, and MicroCloud products. All of these solutions are for application optimization with a maximum performance [per watt] and per dollars to each customer installation.

Looking ahead, we are continuing to [deepen] our service storage technology spectrum by developing the most application optimized and exacting the most energy cost and service efficient platforms. Riding on the success of our storage business, we are developing a new super high density 4U Rackmount solution that will house up to 93.5 inch [fast array] or [setta] hard drive disk with new inclusive features.

We are also developing a brand-new solution that can support even higher GPU or Xeon Phi density. And with our [no air preheated]. [No air preheated] means the system will be able to achieve higher performance and system stability with lower energy costs and TCO. This innovative solution will also support our huge [hot] innovations of GPU or Xeon Phi products, even as power requirement increase. These two upcoming products [nine] are just a few [systems] of many great technologies now on the [holyjong] from Super Micro.

To summarize, we demonstrate industry-leading growth by growing 41.2% year over year and reaching our milestone of $2 billion annual run rate to us. We will continue to leverage our advantages of leading technology, time to market, and product choice to provide exactly what customers want when they want it.

To our customers, we are dedicated to be the one-stop shop for [basic] service storage total solutions on the market. We (inaudible) global service. To our shareholders, we are committed to deliver industry-leading growth with improvement of profitability.

For more specifics on the second 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 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 $503 million, up 41.2% from the same quarter a year ago and 13.5% sequentially. The increase in revenue from last year was properly due to our increase in our service solution sales, as partners continue to look for application optimized solutions, utilizing the latest technology.

On a geographical basis, we had strong growth in the US of 59.7% growth, followed by Europe at 7.8%. Although Asia was down 4.4%, we see continued opportunities for growth. Our other region category, which includes countries such as Canada, Australia, Mexico, and South America, grew 380.1%, as we are seeing increasing opportunities there as well.

The sequential increase in revenue was primarily due to seasonally strong quarter and to our strength in technology and broad product line, which allows us to see strong ramp in Haswell products.

Turning to product mix, the proportion of revenues from service systems was 60.1% of total revenues, which is up from 48.8% the same quarter a year ago and from 57.7% last quarter. ASPs for servers was $3,900 per unit, which is up from $2,700 last year and up from $3,600 last quarter.

We shipped approximately 78,000 servers in the quarter and 1,115,000 subsystems and accessories. We continue to maintain a diverse customer base, with over 700 customers, [who] did represent more than 10% of our quarterly revenues.

Cloud Internet data center revenues was 21.3%, which was an increase from 13.7% in the prior quarter and an increase from 12.9% in the prior year. 57% of our revenues came from the US and 50% from our distribution and resellers.

Slide 9. Non-GAAP gross profit was $84.7 million, up 53% from $55.3 million in the same quarter last year and up 22% from $69.4 million sequentially. On a percentage basis, gross margin was 16.8%, up from 15.5% a year ago and from 15.7% sequentially. Price changes from Ablecom resulted in no basis points change to gross profit in the quarter, with total purchases representing approximately 13.8% of total cost of goods sold compared to 18.1% a year ago and 14.5% sequentially.

The year-over-year increase in gross margins resulted from the ramp of new technologies as well as from more complete server sales, increased scale of our business, and higher utilization of Taiwan facility. Sequentially, gross margin was up due to the ramp of the new technologies as well as increased scale of our business and more complete service solutions.

Slide 10 and 11. Operating expenses were $38.6 million, up from $32.3 million in the same quarter a year ago and up from $34.8 million sequentially. As a percentage of revenue, operating expenses was 7.7%, down from 9.1% year over year and from 7.9% sequentially.

Operating expenses were higher on an absolute dollar basis, primarily in R&D, as we invested in personnel expenses to support the development of our solutions, especially in preparation for a new technology launch over the past year. Sequentially, operating expenses were higher due to $1.9 million of value-added tax refund from Taiwan, which we received during the first quarter of fiscal 2015, and higher compensation benefits and product development costs during the quarter as we continued to roll out our solution around the Haswell product launch.

The Company's headcount increased by 60 sequentially to 1,991 total employees. Operating profit was $46.1 million, up 100.4% from $23 million a year ago and by 33.1% from $34.6 million sequentially.

On a percentage basis, operating margin was 9.1%, up from 6.4% a year ago and from 7.8% 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 $33.5 million or 6.7% of revenues, up 110.9% from $15.9 million a year ago and 44.5% from $23.2 million sequentially. On a non-GAAP fully diluted basis, EPS was $0.65 per share, up from $0.35 per share a year ago and up from $0.46 per share sequentially. The number of fully diluted shares used in the second quarter was 51,645,000.

The tax rate in the second quarter on a non-GAAP basis was 27% compared to 30.5% a year ago and 32.7% sequentially. The rate was lower sequentially due to the retroactive reinstatement of the R&D tax credit in December 2014, which contributed about $0.05 to our EPS.

We expect the effective tax rate on a non-GAAP basis to be approximately 32.1% for the March quarter. The rate assumes no reinstatement of the R&D tax credit for calendar 2015.

Turning to the balance sheet on a sequential basis, slide 12. Cash and cash equivalents and short and long-term investments were $85.9 million, down $34.3 million from $120.2 million in the prior quarter and down $6.7 million from $92.6 million in the same quarter last year. In the second quarter, free cash flow was a negative $44 million, primarily due to inventory and accounts receivables increases described below.

Slide 13. Accounts receivable increased by $64.4 million to $258.8 million to support the growth in revenue. DSOs was 41 days, a decrease of one day from 42 days in the prior quarter. Inventory increased by $67.7 million to $409.2 million to support the transition to Haswell-based products. Days in inventories were 83 days, an increase of 2 days from 81 days in the prior quarter.

Accounts payable was $283.8 million, which was 56 days, an increase of 2 days from 54 days in the prior quarter. Overall, cash conversion cycle days was 68 days, which is one day lower than the prior quarter.

Now for a few comments on our outlook. During the second quarter, we continued to see our strong growth leveraging the foundations we have built over the years and executing our strategy provide optimized solutions to our customers.

As we enter the third quarter, a new technology refresh cycle has started, with many new technologies being introduced. We look to take advantage of our engineering and our broad breadth of solutions to drive our strong growth and profitability.

However, it is a seasonally weak quarter for the industry. Therefore, the Company currently expects net sales for the quarter ending March 31, 2015, in the range of $450 million to $500 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.46 to $0.52 for the quarter. At the midpoint, this would represent a growth of 27% and 32% 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.

Thank you, Howard. The second quarter was another record high for Supermicro, with yearly growth of 41.2%. Even though this was one of our strongest quarters ever, we believe this is just the beginning of our long-term growth as we continue to invest and to expand our foundation by growing professional staff and constructing element for [CVT] worldwide on the strength of our technology transition, our optimized product line, and our overall market opportunity.

We believe we will continue to grow at [market pro] over the industry is known and our share in the competition.

Operator, at this time, we are ready for questions.

(Operator Instructions) Aaron Rakers, Stifel.

Congratulations on the impressive quarter. I guess the first question is just to kind of touch on the topline revenue growth trajectory. You have crossed through the $2 billion annualized mark.

Just curious how you are thinking about the next $1 billion. Are we seeing acceleration and do we kind of see -- are you anticipating any kind of sustained, call it, 20%-plus growth rate here as we move forward?

And then maybe I will just throw my follow-up right in right away. How do we also think about that in the context of the operating margin target going forward? I think in the past, you have talked about 6% to 8% and now you have crossed through that with a 9%-plus number here this quarter. And then I will get back in queue. Thank you.

Yes. Thank you for the question. Yes, I believe our opinion is we will continue to grow consistently. Especially the Haswell new technology transition just beginning.

However, Q1, again, traditional flat quarter. That's why we try to be conservative. However, for fiscal year 2015, I believe we hope we can achieve $2 billion runway -- $2 billion for fiscal year. And that is operations margin, I believe, we will continue to grow. Howard, you may have more detail about it.

Yes, Aaron. And just back to your question -- again, at the midpoint of our guidance, even for this quarter, we are seeing about 27% growth from prior year. So again, when you talk about that 20% that you threw out there, we are exceeding that with even our current guidance.

With regard to the operating margin itself, we are continuing to look at ways to leverage that, obviously, and take advantage of that and further improve our profits going forward.

Mark Kelleher, DA Davidson.

Let me add my congratulations on a great quarter. Want to talk about the -- I guess we're moving down the income statement. Let's talk about the gross margins.

That is a pretty significant step up sequentially. Can you talk about what elements were in there? I know you mentioned Grantley was in there. Maybe product mix. I know data centers was big in the quarter, but that carries lower gross margins.

Can you just give us some puts and takes on the gross margin? And I would make the follow-up question, what percent of revenue in the quarter was Grantley servers? Thanks.

Yes. A couple of factors to improve our margin. One is the new product, right? That is mentioned in Haswell CPU from Intel is still brand-new. And with Haswell product line, we introduced some new architecture, kind of like a [archwad] architecture, [archwad] rack and (inaudible) MicroBlade, kind of [NVMe].

All of those new technologies, we just make them available last quarter. So all of those will continue to grow. And our (inaudible) in Taiwan facility and our facility in USA also all improvements.

And Marc, I think I will just add to that. Like I said, we have a number of factors that we talked about with regards to improving our gross margin. This quarter, we really hit upon a lot of those factors with regards to on top of the new technology launch that Charles talked about, complete service solutions were very high, at 60%. Utilization of Taiwan, the growth of our scale of our business.

All of those contribute -- not to mention services and support and software revenues, too. So a lot of things went well and in line with what we are talking about as far as improving our margins going forward.

(Operator Instructions) Nehal Chokshi, Maxim Group

Thank you. Staying on the gross margin, can you give some directionality for the March quarter, given the strong performance in the December quarter?

Yes. Generally, seasonally, it is a weak quarter and in the past, we have seen some margin softness in those quarters. So again, we have taken that into account and in our models with regards to the guidance that we provided.

We do see some softness there. That could be offset by, again, strength in our technology, strength and growing our scale and what have you.

Okay. Great. And then congratulations on absolutely stunning growth, especially on the systems. Relative to the midpoint guidance of $460 million, there is a $43 million beat.

Could you talk about the drivers of the upside? Was that all on a systems level or was there some component? And then can you drill down within the systems level, perhaps between hyperscale storage system, storage OEMs, and the disruption of the server market from the IBM selling its x86 business?

Yes. All the factors you mentioned pretty much all positive for our business. So we feel very optimistic that we'll grow in the coming quarters. Especially the Haswell, again, like I just mentioned, still new. And NVMe, and that is a brand-new technology, all for a much better performance and latency. So those product line will continue to grow our business for sure.

Within the quarter, of those four things that I talked about, which ones was the biggest contributor to the year-over-year growth that you are seeing on the systems level?

Yes. I think it would be the probably product transition. We saw very a good ramp with regards to our Haswell Grantley platforms during the quarter, as Charles alluded to. The 200%-plus growth year over year. So again, -- quarter over quarter, sorry. And that was very good to our positive improvement.

Rich Kugele, Needham and Company.

Good afternoon and congratulations again. I just wanted to ask a question about the inventory and then a follow-up with them. Is the inventory that you brought in raw components on the Grantley side? Were you concerned with availability?

And then if you could just talk about when you expect the US buildout of your local manufacturing and R&D to be completed and if you expect any type of material gross margin headwinds from that facility as it goes up?

Yes, Rich, let's go with the last question first. With regards to the local facility and we talk about the San Jose -- the green computing park that we talk about here. As I mentioned before, we expect to spend about $21 million over the next year to facilitize that up and get the first building completed there during this next year.

Again, do we see some drag on it? We will be bringing it up as we need it, per se, here. So we won't see much drag with regards to that.

Mark Kelleher, DA Davidson.

Just as a follow-up question. You mentioned the Taiwan manufacturing utilization. Sometimes you give us that number. Can you tell us what that utilization rate is?

Yes, current -- last quarter, the utilization rate I believe was 57%. And looking forward, the utilization will continue to improve. And I hope that we can beat your 80% not too far away.

Aaron Rakers, Stifel

Just to follow on that comment, the 50% -- the 57% utilization, just to be clear, that is a utilization rate on your current existing product line -- your current existing manufacturing lines. Is the 80% also based on that?

I guess what I am trying to understand is when do you fully expect to see the benefits of that in your gross margin line?

Yes, 57% is the current [level facility]. And we believe to reach 80%, hopefully in next quarter or two. And then we are looking for more space after that.

Okay. And then I think I had heard you mention that you did have a 10% customer in the quarter. Are you assuming that you continue to have a 10% customer in your current guidance or -- maybe any framework of what kind of customer that was, how do you expect that to progress as we go forward.

Yes. I mean, we believe this customer will continue to grow and we hope that and have some confidence. And at the same time, we hope to grow more customers. So Supermicro has been a very diversified company in terms of product and customer base.

And was that in the Internet and cloud vertical?

Yes, it was.

It was. Okay, thank you.

Ethan Steinberg, SG Capital

Just a couple pieces I wanted to make sure I heard correctly. Did you say $2 billion, roughly, for the year, is what you were hoping for the fiscal year?

Yes, by end of June, right.

Yes. Okay. And then so 16.8% gross margin was a great breakout quarter. If you look at the new technology transition driving it and the other factors you talked about, it seems like all those are moving in the right direction. We still got a lot of the transition taking place even this quarter.

I guess, can you help us think about directionally? Does that mean there is a decent amount more room for gross margin to move up as we get through this year?

I believe we will continue growing in term of operating margin, but it won't be a big change. It will be relatively consistent, so most of the growing, I believe.

Okay. And I was actually thinking gross margin. Would you say the same answer?

Howard?

Yes. I mean, on the gross margin, I think we are staying with what we have is this great opportunity to drive growth in our business. So again, while we will look at the operating gross margins and preserve those as best we can.

There are opportunities for us to take some market share and we do believe that that will translate to operating margin benefits as we have seen over this past 18 months as we put out this model in the past year.

Okay. But if Grantley goes up as a percentage quite a bit in the quarter you just guided for, wouldn't that have a pretty positive dynamic on the gross margin?

Possible. But at the same time, we also are thinking about a kind of Q1 can be a flat quarter and also [a surprise] for memory hard drive [the dios] a nonfactor.

Okay. Thank you, guys.

Nehal Chokshi, Maxim Group.

Looking at the balance sheet, Howard, could you run through the DSOs numbers again real quickly?

Sure. DSOs on accounts receivable were 41 days. The DSOs on inventory were 83 days. And the accounts payable DSO was 56 days.

Okay. So on a quarter-over-quarter basis, I think you said it was flat for the DSOs on the accounts receivable. Is that right?

Accounts receivables were actually one down one day, from 41 to -- yes.

Okay. Okay. Just trying to understand this, because it looks like the accounts receivable was up 33% quarter over quarter, yet the revenue overall was up 13% quarter over quarter. Presuming that my math is correct, is there a higher amount of days receivable for system level revenue relative to component revenue?

I haven't broken that out, Nehal, but it is based on the average. So we are competing on the average. That may help you on the calculation.

Okay. All right, thank you.

It appears we have no other questions at this time. I would like to turn the call back over to Mr. Liang for any additional or closing comments.

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

Thank you, ladies and gentlemen. That does conclude the Super Micro second-quarter fiscal year 2015 conference call. We do appreciate your participation. You may disconnect at this time.