超微電腦 (SMCI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Super Micro Computer Incorporated Third 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 has been 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 & 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-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 April 21, 2015. A replay of the call will be accessible until midnight May 5th by dialing 1-877-870-5176 and entering conference ID number 7827500. 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. At this time, I'd like to turn the conference over to Mr. Hayes, please go ahead, sir.

Good afternoon, and thank you for attending Super Micro 's conference call on financial results for the third quarter, fiscal year 2015, which ended March 31, 2015. By now you 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 & Presentations tab.

Please turn to slide two. 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 risk factors 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 at www.supermicro.com. We assume no obligation to update any forward-looking statements. Most of today's presentation refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide three 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 four. First, let me provide you with the highlights of our fiscal third quarter. We are pleased to announce that we had another strong quarter of growth. Our revenue reached $471.2 million; it's 6.3% lower quarter-over-quarter and 26.1% higher year-over-year. Non-GAAP net income was $24.9 million or 25.6% lower quarter-over-quarter and 40.3% higher compared to last year. Super Micro 's non-GAAP earnings per share was $0.47 per diluted share compared to $0.65 last quarter, or $0.37 last year. Please turn to slide five. We are pleased that during these traditionally sort of March quarter, Super Micro again achieved strong year-over-year growth of 26.1% and our gross potential remain on track as we now head into the June quarter. Gross this quarter was primarily led by a high system solution demand from key segment of storage, data center and cloud, HPC and enterprise.

Geographically, revenue in the North America was 58.1%, Europe was 18.7%, Asia was 15.9% and other region was 7.3% of total sales. Our geographic revenue percentage would remained consistent from our previous quarters. But the lower overall revenue (inaudible) West Coast harbor strike and some projects may now postponement. Fortunately these issues have been not resolved and we had confidence that our strong gross ratio will carrying into the June quarter.

Let's dive into our products. Our Service System contribute 64.1% of our total revenue, which is another record high for our System business. Our record grows in OEM and Direct account 53.9% of total revenue was also in line with our strong system demand. In particular, the Internet Datacenter and Cloud segment have maintained their recent gross momentum and reached 20.7% of total revenue. The server system (inaudible) indicate our transition into a total solution provider had been successful. As I've mentioned before, more and more customer like our computer system integrated. We saw the way, a management utility offerings. In addition, our faster growing Service business had increased the value proposition of our total solution. With our expanding onsite and upcoming online services, customers new and current attract to our service capability as we enable them to achieve better time to market, higher quality, lower TCO, then our traditional hardware business model. This is the result or a significant investment we have made recently in both software and service business units as they ramp up quickly. But mostly importantly our Software and Service gave our a piece of mind that exceeds that cost of their investment. As for our optimized hardware solutions, the transition to our expand generation of product based on Intel's hardware DP processors is ramping organically as expected, growing 26% quarter-over-quarter.

In particular the new Ultra server architecture and -swappable NVMe technology among others, has strongly encouraged customer to move ahead. Also our twin architecture including FatTwin and TwinPro Solutions grew 43% year-over-year. Our mature FatTwin products line undergo further optimization and defining meant to serve a different verticals.

We now have also the variation of a FatTwin models, many of which have been deployed in hyper-scale open environment, because of their high performance, high-density, higher efficiency and lower TCO. This success of the product prove that our film box business model is a perfect match to create application-optimized solutions in the emerging technologies. We are continuing to optimize that Twin architectures with new and exciting feature coming soon.

Storage continues to be a leading market vertical for Super Micro with 57% growth year-over-year and up 7% sequentially, which indicated great product momentum in this seasonally soft quarter. On a combined base, our storage solution were over 20% of total revenue. As I had mentioned last quarter, we are partnering with technology providers to create the next generation of hyper-converged solutions such as EVO:RAIL and Virtual SAN. We are also collaborating with partners on the new hybrid storage solutions, for example now recently announced Ethernet kinetic open storage platform. Moreover to speed up the strong growth momentum, we had just released our brand new 4U JBOD storage (inaudible). That supports up to 93.5 inch hard drive for a total of 720 terabytes of SAS3, 12Gb/s performance. This huge storage capacity enclosed in easily serviceable top loading hot-swappable architecture. It also features dual hot-swappable expander module with 4 Mini-SAS HD ports maximize throughput and failover redundancy. This New 4U storage solution is perfect for media streaming, nearline and archive storage applications. It is just the beginning of a new generation storage product from Super Micro. And we are looking forward to bring these high performance optimal storage solutions to our customers starting this quarter.

On the computing side GPU/Xeon Phi solutions for HPC and enterprises continue to grow consistently, and it grew by 67% year-over-year. We worked to deliver a brand new architecture with 4 GPU or Xeon Phi solutions in 1U this quarter. This streamlined layout architecture enabled our GPU to be direct connected to a CPU PCI-E, without any driver or any cables, achieving that best signal integrity and minimum latency. The optimized (inaudible) is also advantageous in performance and power efficiency with its pre-heated GPU/Xeon Phi card that minimizes cooling power consumption. This design define Super Micro 's new green computing commitment while reaching higher level of performance to meet today's and tomorrow's supercomputing demands

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To summarize, we continue to outpace the industry growth by growing 26.1% year-over-year this quarter. We will stay on course and evolve Super Micro into a server, storage total solution provider, with our strong growth trend, driven by technology, innovation in our hardware. We are expanding our outreach to new markets with our software products and service offering. With that said, we are well positioned to finish the fiscal year 2015 on a very strong note. 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 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 of the Company Presentation accompanying this conference call.

Let me begin with the review of the third quarter income statement. Please turn to slide seven. Revenue was $471.2 million, up 26.1% from the same quarter a year ago and down 6.3% sequentially. The increase in revenue from last year was primarily due to our increase in Server Solutions. On our geographical basis, we had strong growth in the US of 34.4%, followed by Europe at 8.7%. Although Asia was down 4.6%, we see great opportunities for growth in the June quarter. Other regions grew $24 million or 226.7%, which includes Australia and Canada. The sequential decrease in revenue was primarily due to seasonal weak quarter compounded by the effects of the West Coast Paychex. We had a number of projects which were delayed or delivered late in the quarter and not recognized as revenue.

Slide eight, turning to product mix, the proportion of revenues from Server Systems was 64.1% of total revenues, which was up from 50.1% the same quarter a year ago and from 60.1% last quarter. ASPs for servers was $3,900 per unit, which is up from $2,600 per unit last year and the same as last quarter. We shipped approximately 77,000 servers in the quarter and 1,070,000 subsystems and accessories. We continue to maintain our diverse revenue base with over 700 customers. One customer did represent more than 10% of quarterly revenues. Cloud Internet Datacenter revenue was 20.7% which is an increase from 20.3% in the prior quarter, an increase from 15.9% in the prior year. 58.1% of our revenues came from the US and 46.1% from our distribution and resellers.

Slide nine, non-GAAP gross profit was $77 million, up 34% from $57.5 million in the same quarter last year and down 9% from $84.7 million [sequentially]. On a percentage basis, gross margin was 16.3%, up from 15.4% a year ago and down from 16.8% sequentially. Price changes from Ablecom resulted in no basis point change to gross profit. In the quarter, with total purchases representing approximately 14.7% of total cost of goods sold, compared to 14.4% a year ago and 13.7%, sequentially. The year-over-year increase in gross margins resulted from the ramp of new technologies as well as more complete Server Solution sale and increased scale of our business. Sequentially, gross margins were down due to seasonal weakness in the quarter and lower utilization of the Taiwan facility.

Slide 10 and 11, operating expenses were $42 million, up from $33.2 million in the same quarter a year ago and up from $38.6 million sequentially. As a percentage of revenue, operating expenses was 8.9% same as year-over-year and up from 7.7% sequentially. Operating expenses were higher on an absolute basis year-over-year primarily in R&D as we invest in personnel expenses to support the development of our total solutions. Sequentially, operating expenses were higher due to about $1.5 million of payroll taxes as they are reset at the beginning of the year. In addition, we had a foreign exchange loss of $732,000 compared to a foreign exchange gain of $844,000 early from our Taiwan dollar-based loans. Historically, foreign exchange was $637,000 gain year-to-date in fiscal year 2015 compared to $103,000 gain for the same period in fiscal 2014.

The Company headcount increased by 153 sequentially to 2,144 total employees, to support the expansion of the business such as enterprise, software and services. Operating profit was $35 million, up by 44.2% from $24.3 million a year ago and down by 24% from $46.1 million sequentially. On a percentage basis, operating margin was 7.4% up from 6.5% a year ago and down from 9.1% sequentially.

We continue to focus on the many market opportunities we have while leveraging the investments we have made in our infrastructure to continue to deliver our operating margins and profits. Net income was $24.9 million or 5.3% of revenue, up 40.3% from $17.8 million a year ago and down 25.6% from $33.5 million sequentially.

Our non-GAAP fully diluted EPS was $0.47 per share, up from $0.37 per share a year ago and down from $0.65 per share sequentially. The number of fully diluted shares used in the third quarter was 52,680,000. The tax rate in the third quarter on a non-GAAP basis was 28.3% compared to 26.4% a year ago and 27% sequentially. The rate was higher sequentially due to the retroactive reinstatement of the R&D tax credit in December of 2014. We expect the tax rate on a non-GAAP basis to be approximately 32% for the June quarter.

Turning to the balance sheet on a sequential basis, cash and cash equivalents in short and long-term investments were $112 million, up $26.1 million from $85.9 million in the prior quarter and up $7.6 million from $104.4 million in the same quarter last year. In the third quarter, free cash flow was a positive $4.1 million primarily due to our net income of $23.1 million, a decrease in accounts receivable, offset in part by an increase in inventory described below as well as building investments of $8.5 million to support the continued growth of our business.

Slide 13. Accounts receivable decreased by $37.2 million to $221.6 million due to less revenue sequentially. DSOs was 46 days, an increase of 5 days from 41 days in the prior quarter. Inventory decreased by $21.2 million to $430.4 million to support the growth of the business in a seasonally strong quarter as well as the effects of the port strike.

Days in inventory were 96, an increase of 13 days from 83 days in the prior quarter. Accounts payable was $261.6 million, which was 62 days, an increase of 6 days from the 56 days in the prior quarter. Overall cash conversion cycle days was 80 day, which is 12 days higher than the prior quarter.

Now for a few comments on our outlook. During the third quarter, we continued our strong growth in a seasonally challenging quarter and more so by the West Coast port strikes. As we ended the fourth quarter, we took -- look to take advantage of our broad breadth of solutions, which have expand beyond hardware to include software and services to drive our strong growth and profitability in the seasonally strong quarter for the industry. We will build upon our experiences during the past quarter to improve, to continue our delivery of products and services to our customers and partners. Therefore, the Company currently expects net sales for the quarter ending June 30, 2015 in a range of $510 million to $560 million.

Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.53 to $0.62 for the quarter. At the midpoint, this would represent a growth of 25% and 45% in revenue and EPS respectively from the prior-year. This would make fiscal year 2015 revenues of about $2 billion and of about $2.16 EPS, which would represent growth from the prior-year of approximately 33% and 61%, respectively.

This is currently expected that the outlook will not be updated until release of the Company's next quarterly earnings announcements. 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. With more than 26% revenue growth year-over-year, Super Micro is again one of the fastest growing company in the IT industry, if another fastest. Despite of the seasonally [saltonies], our long-term gross trend remain intact. With our robust products and services. As we're looking forward to a strong finish this fiscal year. We are well positioned with prepared foundation rapidly expanding customer base under the most leading edge product name.

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

Thank you. (Operator Instructions) Alex Kurtz, Sterne Agee.

Thanks guys for taking the -- couple questions here. First, Howard, it looks like the Port of Oakland was shut down for four days that's generally what I'm seeing here and if I just think about your daily revenue either internationally or domestically on a daily basis excluding weekends obviously, it's like $4 million to $7 million a day. So I mean, could this have been the $10 million to $15 million of revenue that got delayed out of the quarter or it just kind of vaporize it to a certain degree?

Alex, actually port strike was much longer than that, but to get back to what was direct effects we saw, we saw our pushed on revenues approximately about $5.5 million and that doesn't calculate with some of the other projects that we had also that were delayed, because we did have quote-unquote the [chassis] we want to call it to fully complete our things, but the direct affect of revenue that we did not recognize that we did ship was about $5.5 million.

And how does that impact the June quarter, if at all, I mean the next question would be, why wouldn't you get that back in the June quarter? So how would you.

(multiple speakers) come back in the June quarter. That's a record high.

So, when you think about the June quarter guidance, is there some kind of conservatism that you're putting in around the grandly uptake or just general macro concerns, I think some of us were just expecting a little bit healthier guide on the June quarter. So just trying to understand if that has any kind of -- is there anything else beyond this harbor strike that you're seeing that's impacting the macro outlook for the June quarter?

Yes, seasonally. I think, we are just coming out of this seasonally weak quarter. We did see a lot of projects out there. A lot of opportunities for us to further capitalize upon and at the midpoint of the guidance I want to remind folks that we've got about -- we're sitting at about 26% -- 25%.

Okay and just last question from me and then I will pass it on. If you were to think about, you obviously shipped a lot of systems this quarter. And it would seem that if you were normalizing this quarter's revenue for say December, because of volume, would you have eclipsed 17% gross margin if you were looking at this quarter's mix of system, the components if you're to say, so you did that mix back into the December quarter?

I think you're going to see like seasonally we've guided it's a weak quarter and then easily has an impact into our margins per se. As we get into a stronger quarter, you typically do see a pickup in margins there. We have a lot of good factors that are going on as we get the capacity utilization of Taiwan up, seasonally strong quarter, continuing growth of our business in the server side of it. Those are all play factors that will help us grow our margins and our operating market.

Rich Kugele, Needham & Company.

Can you get into a little bit of color around the inventory had increased again in the quarter, you talked about some of the port strike being related to that as well as just growth in the business, but that was two quarters in a row of increasing inventory. Is there anything unusual going on with the composition of that inventory? And then I will follow up.

Yes, I mean, for the March quarter because of the port strike, so we have some tough time of get to the chassis especially, but now all the program have been up pretty much fixed, so our inventory now growing to a very healthy position, so it would be very helpful for June quarter.

So you would expect the inventory to exit at a lower level from June?

Yes, the June quarter for sure, I mean inventory is kind of have enough, the business grow.

Okay. And then in terms of the subsystem business with most of the push-out in projects on that side, and can you just elaborate a little bit, maybe, about the end markets that are buying those subsystems?

Yes, I think that it's postponed because of no enough chassis basically, so customer still -- until that we ship most of them on April and somewhere between next month May.

Okay. And then just lastly given the significant improvement on the storage side for multiple quarters now, does it change your long-term views on what you think the operating margin can deliver? Or should we think of the storage business as being more comparable with the overall system side from margin profile?

Yes, our storage products continued to be much stronger, right? Especially this quarter, we just introduced our (inaudible) for you and that very high-density hot-swappable kind of the storage solutions, and this again, like I always just say the first beginning, we have a much stronger storage product line, we have the available months after months.

Mark Kelleher, D.A. Davidson & Co.

How about if we talk a little about the Grantley cycle? Something we usually talk about on this call. How much of your server sales are total sales now Grantley based and how do you see that cycle playing out over the next few quarters?

Yes Mark, this is Howard. Again, we saw a good growth in that side as we expected. Quarter-to-quarter, it went up about 26% for us again and that's kind of is in line with what Intel was talking about with regards to their conversion of their processor output to about half over the last six months. So, it's coming out nicely for us. We have a lot of new products. A lot of products to adopt this new processor that Charles talked about a bit out there. So, we're seeing great potential in this ramp coming.

So, would you say that half of your sales are based on that right now, in line with Intel?

Not quite half, again not quite half.

And can you just describe how you picture the cycle playing out? Does this give you a surge for the next couple of quarters and then kind of plateau and pull in, how do you anticipate that affecting -- ?

Yes, I believe in, at least in the next two coming quarters, we will continue to see that beneficial from the hardware, I mean that Grantley platform. But that is the June quarter, September quarter.

Mehdi Hosseini, SIG.

Would it be possible to elaborate on the mix of the storage either as overall revenue or part of the sub component?

Yes, it's around 20% of our revenues now, a little bit above 20% of our revenues. It's a mix of basically the -- if you want to call it the hyper-scale next Gen type of storage applications as well as our traditional JBOD and Head Node type of storage. We've got some very exciting products as Charles mentioned earlier on the other side of the box, with regards to the JBOD, and Head Node side as well as increasing our partnership base out there on the next Gen and hyper converge markets.

Sure. So, to that extent, with some of your component vendors also talking about a strength in the nearline, looking into the second half of calendar year, would there be any conflict of interest that would actually slow down or be viewed as a headwind as you try to expand the storage business line.

Yes, the market is always competitive right? So, Super Micro 's advantage since 10 years ago, since [Latte] was founded, Our advantage always better product, better architecture, time to market, better quality and now better total solution, including system management software and on-site service and also commission online service.

Sure. And then just one follow-up, how should we think about the ASP trend for both server and sub-component looking into the June and September quarters?

Yes, I think as we see density increasing demand and our ability to provide the best end solution out there in the market, historically you've seen our ASPs continue to grow quite frankly we were at $3,900 this past quarter, prior year was $2,600 and if you want to go back a couple of years that was down to $1,900 back in fiscal. So you've seen a continuing trend that's increasing quite frankly because of the density the box and solutions that we're offering, that we're pushing more performance for a box into each one of the solutions that we're delivering. And then we add software and support services on to that that again increases the value added to that box.

Sure. There is one other follow-up question.

Yes.

In the prepared remarks, you talked about the postponement of a project. And I've perceived that as completely independent of a port shutdown, would you be able to elaborate on what this project entails to and has this been back on track again?

Yes, I have been -- I would have to say pretty much as 100% back on track. So the postponement for March ratio, we have increased our Q1 revenue.

Okay. I'm just curious why this project was delayed? Was that due to customer changing --

Because no enough components, especially chassis.

Okay. So it was tied into the port shutdown?

Yeah, yes, we've been cheapest on chassis and that's why we -- it will cost us more for -- in March.

(Operator Instructions) Aaron Rakers, Stifel Nicolaus.

Yes. Thanks for taking the questions. I want to will follow-up on that last question. Just so I'm clear, the $5.5 million impact in quarter is related to the port shutdown, is there a separate impact specific to the project delay and can you size that impact?

Indeed, there are project delay mainly because of the port strike. And that's why we have no way to deliver on time. So however, those have been improved in April and come in May. And the total port strike not just $5.5 million, indeed it was caused lot of other deal that we cannot slip in March quarter. However, most of them will be shipped in June quarter.

So just to be clear, so that the 5 -- there is a bigger impact than just the $5.5 million or $5.5 million is the total impact for the quarter?

$5.5 million Aaron is basically what we did shift, but we could not recognize because the success in terms of what you have you that were sent out in the quarter, but we weren't able to recognize, because of the delay cost, late deliveries there. The other part that Charles was alluding to is other projects that we were -- we have not fulfilled yet, because of the product delays, component delays, that is large in number.

That's a large in number. But you can't quantify that number?

We haven't quantified that. That's correct.

Okay. I just wanted to be clear. Real quickly, a couple other questions. You guys -- when you look at the model what you've outlined for this next quarter, it looks like you're going to be at if not above the high end of what you previously talked about is kind of the 6% to 8% operating margin range. Where do you stand on providing a longer-term update to that, should we think about 8% plus is being the new target model or any kind of framework of how we should think about that longer-term would be helpful?

Yes. Aaron, I think, like I said as you look at the numbers, I look at presenting some of that as far as reaching the $2 billion target if we hit the midpoint and then what our EPS growth would be at about $2.15 or $2.16 there. We will take a look at our model at the end of this quarter and then take a look at providing some guidance.

That's helpful. And then final other two questions. Why was G&A expense up so much sequentially? Is there any kind of one time nature to that or is that a new level that considered going forward?

Yes. Primarily in the foreign exchange, I would like to characterize that. As I mentioned, we took a foreign exchange loss this quarter of approximately $700,000 versus about $800,000 gain. So, if you flip those two around, again those cause the majority of the change sequentially in our G&A expenses. Typically, it's been fairly stable over the course, but the last few quarters, has not. If I had to measure it today, we measured it on today's rate that would probably turn into about a $300,000 gain. So again, we'll take a look at breaking it up separately and looking at other means to potentially hedge it or what have you.

And then the final real quick question is how do you think about the long-term model from a cash conversion cycle basis? I know that's been obviously impacted by some of the items that hit this quarter, but longer term, how should we think about cash conversion cycle?

So I think today in my cash conversion, should hopefully come down I think was impacted a bit above the inventory this time around. Also I wanted to note the property itself, we spent about $8.5 million during the quarter in property and we will continue to make some investments there. But we do believe it's going to be positive.

(Operator Instructions) Rich Kugele.

Just the Taiwan utilization rate in the quarter. I don't know if I missed that, and then what is the timing for your new California facility to be up and running?

For Taiwan, if you see the last quarter, our revenue was lower because we have one big deal postponed shipping to, I believe this month, April right. As to USA, our facility is -- utility is getting ready. The first (inaudible) ready to move in by July. So after that, there won' t be another beneficial to our operation.

Okay. And what was the utilization number exactly?

46% Rich was the utilization number. I wanted to also tie back on a question you had earlier potentially with the operating expenses about. We do see leverage out there. I talked a bit with Aaron with regards to the effect of ForEx, we continue to see leverage out of there. We are making investments in our software and support, in those types of areas and serve sales people, but we do continue to see and keep an eye on our operating expenses, so we can get leverage there.

Okay, it' s interesting your utilization fell that much down into 46% and then you also were spending on things like air freight, you would think that next quarter on a much better revenue number and perhaps in margin in your OpEx would both be significantly better, yes?

Yes, basically --

And there appear to be no further questions at this time. Mr. Liang I'll turn things back to you for closing remarks.

Thank you for joining us today and we're 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 the Super Micro third Quarter of Fiscal Year 2015 conference call. We do appreciate your participation and you may now disconnect at this time. Thank you.