超微電腦 (SMCI) 2016 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 2016 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 22, 2015. A replay of the call will be accessible until midnight, November 5, by dialing 1-877-870-5176 and entering conference ID number 9354543. 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 Supermicro's conference call on financial results for the first quarter of fiscal year 2016, which ended September 30, 2015.

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.

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 2015 and our other SEC filings. All of those documents are available from the Investor Relations page of Supermicro's website. We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to Slide 3 of this presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation.

I will now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you and good afternoon everyone. First, let me provide you with the highlights of our fiscal first quarter.

First-quarter revenue was $530.2 million. It is 7.6% lower quarter-over-quarter and 19.6% higher year-over-year. Non-GAAP net income was $23.4 million or 21.9% lower quarter-over-quarter and 1% higher compared to last year. Supermicro's non-GAAP earnings per share was $0.45 per diluted share compared to $0.57 last quarter or $0.46 last year.

As previously disclosed, first-quarter revenue was lower than expected due to seasonal effects combined with weaker European and Asia business activity and some customer push-outs. We usually expect a seasonal effect in the summer quarter due to our summer holiday. Nonetheless, first-quarter revenue was 19.6% higher year-over-year. That represents a strong start to this fiscal year.

Geographically, North America revenue was up over 40% year-over-year. Europe was down by 2.1% year-over-year. In Asia, revenue was lower year-over-year by 15%, led by the decline in China of 14.3%. The rest of Asia was up 6.5% year-over-year and up sequentially by 15.6%.

Once again, we saw 19.6% growth in a seasonally weak quarter. We are off to a strong start for meeting our fiscal 2016 goals target at over 20% growth rate. This is supplemented by the effect that we have achieved new highs with our direct customer business, which accounted for 55% of total revenue to date.

Server and storage systems account for 69.2% of total revenue, which is also a new high. This encouraging effect has shown that our customers are gravitating towards our higher value computer system and total solution offering. We should just say our growth strategy for 2016 remain continual product evolution to grow key business verticals such as cloud, Internet data center, storage, embedded, IoT, HPC, and for sure enterprise.

Cloud and Internet data center were particularly strong and account for 24.8% of total revenue led by our Ultra, TCO, and Twin product lines. That should not be surprising because each of these three product lines were uniquely optimized for cloud hyper converged applications. The Ultra architecture provides system flexibility, expansion, and extreme I/O (inaudible) and density while our TCO provides cost-effective solutions to our customers.

The Twin architectures delivered the best performance per watt with greater computing in storage density and serviceability. The perennial 1U TwinPro architecture with the Power Stick technology had taken a step forward on optimizing the Twin architecture and addressing the floor system redundancy in a compact 1U form factor optimized for today's big data and mission-critical applications, features that our competitor cannot offer. Also optimized for the (inaudible) market and a favorite of hosting.

Our MicroBlade offers at events power saving, material architecture leads to the industry by dramatically increasing computing density to maximize performing per watt, per dollars, and per square foot, all the while offering the best-in-class TCO.

The upcoming 3U MicroBlade is an evolution of our original MicroBlade, reducing in form factor for unparalleled flexibility, EGF deployment and serviceability. The new MicroBlade is also a great choice for all Flash storage applications.

Storage solutions continue to evolve into a major element of our revenue mix and growth strategy. It was approximately 22% of total revenue and grew 60.3% year-over-year. Our storage solutions are in strong demand due to the market quickly adopting software defined storage trends. Our robust product lines are designed with excellent choice of performance, form factor, density, and of course, leading power efficiency.

Representing our innovation, we offer a leading NVME Flash storage array solution, providing customers a scalable, high [I/O] storage (inaudible) that deliver performance, reliability, cost effectiveness, as well as EGF management in an all Flash and hybrid storage solutions.

We also introduced a 4U 90P hyperscale storage JBOD, and 4U CTP high-density storage server featured in single and redundant controller options. With the industry's strongest product line and leading architectures, we continue to extend our community-led advantages and fuller penetrated a new storage market by delivering higher performance, data workflow of any scale.

On our embedded and IoT solutions, we had optimized our compact form factor product portfolio to also increase computing and graphical performance with greater energy efficiency. This product experienced greater success in commercial, industrial, medical, and military applications.

In combination with our new IoT gateway, Supermicro offers total end-to-end infrastructure solutions for the most mission-critical data dependent operations and applications.

Our high-performance computing continued to be a key growth are this fiscal year. Although HPC projects were typically seasonal, our new products will service as a growth driver for our potential customers. Our 1U 4 GPU/Xeon Phi system, which has streamlined there our architecture, enable PCI-E direct contact for low latency as well as eliminating cable, repeater, and GPU per E for maximum airflow and cooling. With these great products, we should achieve an even stronger penetration in the HPC market.

The enterprise market is another fast-growing area for Supermicro. We are invest to this market by developing total solutions, including software as a service, which we had discussed in previous quarter. The solution, mission-critical and uptime requirement contributed to the 150% annual growth rate of our on-site service and management software business.

We expanded our Supermicro System Management, SSM offering, to reduce the cost and time for system deployment, updating, and service. We saw our availability over our industry standard grey fish management API. We will provide our customer with greater interoperability, choice, and flexibility. Although our enterprise market overall may maintain flat, we expect continued strong share growth in our enterprise market with our superior product line and solution portfolio.

In summary, Supermicro is growing in many different market verticals. We have products that offer choice, innovation, performance, savings, and are optimized for our customer applications. We expect to have a strong fiscal 2016, growing significantly faster than the rest of our industry, targeting over 20% growth annually.

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 the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with a review of the first-quarter income statement. Please turn to Slide 7.

Revenue was $530.2 million, up 19.6% from the same quarter a year ago and down 7.6% sequentially. The increase in revenue from last year was primarily due to our increase in service solutions, which was up 43.5%, led by our growth in cloud, Internet data center of 116.7% and storage of 60.3% year-over-year.

On a geographic basis, we had strong growth in the US, up 42.8%, offset in part by weakness in parts of Asia and Europe. The sequential decrease in revenue was primarily due to seasonal weakness coupled with some geographical weakness in Asia and Europe.

While our OEM and direct customer business was up 2.2%, our distributor revenue was down 17.2%. Complete servers were up 3.7% while subsystems and accessory business was down 25.7%. Our cloud Internet data center business grew 47.3%, which benefited both our OEM direct customers and complete server numbers.

Slide 8. Turning to product mix, the proportion of our revenues from service systems was 69.2% of total revenues, which was up from 57.7% in the same quarter a year ago and up from 61.7% last quarter. ASPs per servers was $4,200 per unit, which is up from $3,600 per unit a year ago and from $4,000 last quarter. We shipped approximately 87,000 servers in the quarter and 916,000 subsystems and accessories.

We continue to maintain a diverse revenue base with over 700 customers. One customer did represent more than 10% of our quarterly revenues. Valid Internet data center revenue was 24.8%, which was an increase of 15.5% from the prior quarter and from 13.7% in the prior year. 65.4% of our revenues came from the US and 45% from our distributors and resellers.

Slide 9. Non-GAAP gross profit was $83.1 million, up 19.7% from $69.4 million in the same quarter last year and down 7.7% from $90 million sequentially. On a percentage basis, gross margin was 15.7% for this quarter. Price changes from Ablecom resulted in no basis point change to gross profit in the quarter, with total purchases representing approximately 13.2% for the total cost of goods sold compared to 14.5% a year ago and 11.9% sequentially.

Gross margin was the same as the prior year. Higher sales, including service solutions, the continued growth of X10 household-based solutions, and stronger vendor relationships were positive to margins. This was offset in part by higher cloud Internet data center sales, which typically have lower margins.

Gross margin sequentially was the same. Higher sales of complete service solutions as well as the continuing growth of X10 Haswell products were positive to margins. A seasonally weak quarter, declining component pricing, and lower utilization with the Taiwan facility at 51.3% had a negative effect on margins.

Operating expenses were $47.1 million, up from $34.8 million in the same quarter a year ago and up from $45.3 million sequentially. As a percentage of revenue, operating expenses was 8.9%, which is up from 7.9% in the same quarter a year ago and up from 7.9% sequentially. Operating expenses were higher on an absolute dollar basis year-over-year, primarily in personnel expenses to support the development of our total solution and the lack of a $1.9 million R&D VAT tax credit from Taiwan which occurred last year. Sequentially, operating expenses were higher due to higher personnel expenses of $4.1 million due to annual salary adjustments and $1.4 million of higher legal and accounting expenses primarily related to the investigation of marketing expenses offset in part by a higher foreign exchange gain of $1.8 million.

The Company headcount increased by 116 sequentially to 2,401 total employees to continue to support the development of our technologies and growth of our business. Operating profit was $35.9 million, up by 3.8% from $34.6 million a year ago and down by 19.7% from $44.8 million sequentially. On a percentage basis, operating margin was 6.8%, down from 7.8% a year ago and 7.8% sequentially. Net income was $23.4 million, up 1% from $23.2 million a year ago and down 21.9% from $30 million sequentially.

On a non-GAAP, fully diluted EPS was $0.45 per share, down from $0.46 per share a year ago and down from $0.57 per share sequentially. The number of fully diluted shares used in the first quarter was 52.042 million.

The tax rate in the first quarter on a non-GAAP basis was 34.4% compared to 32.7% a year ago and 32.6% sequentially. The tax rate was higher sequentially due to the retroactive reinstatement of the R&D tax credit back in December of 2014.

We expect the effective tax rate on a non-GAAP basis to be approximately 34% for the December quarter. Should the R&D tax credit be reinstated in December 2015 like it was in 2014, the impact may be 7% lower in December quarter. The Company is working on our tax structure to leverage our overseas expansion, which may reduce our tax rate in the coming year.

Turning to the balance sheet on a sequential basis, Slide 12. Cash and cash equivalents and short-term investments were $113.6 million, up $15.5 million from $98.1 million in the prior quarter and down $6.6 million from $20.2 million in the same quarter a year ago. In the first quarter, free cash flow was $12.6 million primarily due to the increase in Accounts Receivable of $25.4 million, net income of $20.5 million, and an increase in income tax payable the $6.8 million, offset in part by a decrease in Accounts Payable of $37.7 million and an increase in property, plant, and equipment of $7.7 million mainly related to the new manufacturing facility and warehouse building which was completed in August 2015.

Slide 13. Accounts Receivable decreased by $25.4 million sequentially to $297.1 million due to lower revenues in a seasonally weak quarter. DSO was 54 days, an increase of 11 days from 43 days in the prior quarter. Inventory decreased by $2.1 million sequentially to $461.4 million. Days in inventory were 95, an increase of 12 days from 83 days in the prior quarter as we had seasonally weakness in the current quarter coupled with preparation of inventory for growth in the next quarter. Accounts Payable was $263.2 million, which was 58 days, an increase of six days from 52 days in the prior quarter. Overall cash conversion cycle days was 91, which is 17 days higher than the prior quarter.

Now for a few comments on our outlook. In the first quarter, we grew about 20% in a seasonally weak quarter in which we went live with SAP in the US, continued to expand our product lines, and opened a new facility. As we enter the second quarter, we continue our work to rollout SAP in Asia and Europe to go live during the early part of the next calendar year, and we look to leverage the investments we have already made to drive our strong growth and profitability in a seasonally strong quarter for the industry.

We have tempered our guidance for some of the weakness we saw at the end of last quarter. Therefore, the Company currently expects net sales for the quarter ending December 30, 2015 in a range of $580 million to $630 million. Assuming this revenue range, the Company expects non-GAAP earnings per diluted share of approximately $0.54 to $0.64 per share for the quarter. At the midpoint, this would represent a growth of 20.3% in revenues and a decline of 9.8% in EPS from the prior year.

Looking forward beyond the quarter, we are targeting fiscal year 2016 revenues at a growth rate of over 20%. These targets reflect our strategy to take advantage of the opportunities which we have to take market share. 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. With 19.6% revenue growth year-over-year, we are off to a strong start for fiscal 2016. We remain as the fastest-growing major company in the IT industry, growing over 20% annually versus the flat or low single digit in the rest of our industry.

Our long-term growth strategy demands impact with our robust products and service. We are well-positioned in the key growth geos and the markets, and we will move ahead with our strategy for greater success this year.

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

(Operator Instructions). Mehdi Hosseini, SIG.

Howard, back to your expectation for revenue growth of more than 20% in fiscal year 2016, how should we think about progression of gross and operating margin?

Well, Mehdi, I think, like I said, a lot of the factors we talked about with regards to moving our gross margins higher and our operating margins higher is leveraging the growth in our revenues. So again, we do see progression as we leverage on those revenues going forward. We have put out targets previously and we are still -- we have not changed those targets for our gross margins, that being at 16% to 18% and operating margins at 7% to 9% within the next few years.

Great. And regarding China, that was down this past quarter. It seems like the growth for some of the key segments in China could actually come in higher than other regions over the next several quarters. How do you plan on expanding your capacity going forward? You are expanding capacity in California, but is there any possibility or scenario where you would slow that down in favor of increasing capacity in Taiwan that would support the growth of some of the customers in China?

Indeed, our growth in Japan and Korea is getting very strong. And also, we plan to support Europe from Asia directly for key accounts. So, the Taiwan facility capacity should be continual (inaudible) work continue to improve.

Charles, would the capacity, available capacity, in Taiwan be good enough for China given the assumption that, to participate in growth in China, you may have to have a local presence, especially when it comes to manufacturing?

Yes, that's basically true. So, we support China from Taiwan, and that's much better than before. We supported China from USA two years ago. So now we support from Taiwan, and that is much better than that. And at the same time, our growth in Japan and Korea had been kind of in very good shape.

May I just add that we have additional lines there in Taiwan that we can always bring up facilities currently capable of holding additional lines there. We only have three lines up.

Got it. Thanks.

Mark Kelleher, D.A. Davidson.

Let's stay on the China topic. That was down pretty significantly year-over-year. What's the issue there? Is that a macro issue. or is there some local competition there that's blocking some growth?

I guess it's a combination, but it's also seasonal impact. So we are improving our investment channel, especially sales and our service team, similar to Korea and Japan.

Are you seeing increased competition there from Lenovo?

We see overall our local company was becoming more aggressive recently. But still, with a stronger product line, we have good confidence -- continue to gain market share in channel.

And Howard, are we still expecting some improvement in gross margin from better utilization in Taiwan manufacturing? Is that still possible?

Yes.

Okay. Thanks.

Aaron Rakers, Stifel.

Thanks for taking the questions. I'm sorry to do this, but I want to stick on the China topic a little bit. When you look at the numbers, I think you actually had reported that the rest of Asia PAC was up 15% sequentially, or 15.6% sequentially. Real quick math to me would still suggest that China was actually down also north of 40% on a sequential basis. So, I'm just curious. As you roll forward your outlook, given how significant China looks like it was historically to Asia PAC, what are you assuming for China out over the next quarter, couple of quarters? Was there some one-time deals that pushed out there or --? I'm just trying to gauge what's baked into your expectations on the next couple of quarters.

Yes, Aaron, I think we do still have good partnerships in China. We still see that area to be a good growth area for us per se. So again, some of this is baked into it.

As Charles also alluded to with regards to the rest of Asia, we have some very good potential out there in Japan and Korea and other places, so there are great areas for us to continue to grow out there in the Asia area.

And can you talk a little bit as a follow-up to that or maybe a little bit adjacent to that, but can you talk a little bit about the push-outs you saw at the end of the quarter? How material were they relative to your initial, let's say the midpoint of your initial guidance. Can you rank seasonality versus the push-outs in the quarter and what the contributions were from that relative to the reported results?

Let me add a little bit. Basically, we see some push-out in October, this month. Indeed, we already see some increase on October. So (technical difficulty) obviously some push-out from September.

And also our SAP transition, that kind of should hold down (inaudible) a little bit. Not much, but in the last three months, we already fixed most of our challenge. So now, in terms of response to customer demand is get back to normal. And I believe, looking forward, we will continue to improve because the people now are more familiar with our new system now.

Okay. I'll cede the floor. Thank you.

Alex Kurtz, Sterne CRT.

Just to follow-up on Aaron's last question and, Charles, your response. Did you just say that you guys closed some business that pushed out from September and you closed it in October? Did I hear that right?

Yes. Basically, we saw some push-out from September and we see some increase in October, yes, that's right.

But specifically Charles, the deals -- the bigger deals that you guys pushed out from September, those deals have closed in October?

Yes, I think -- Alex, like I said, seasonality was probably the main thing that we had driving the quarter per se. So again, push-outs weren't the majority.

We don't have to chase that. So just a question on the range here, Howard. I think last quarter, you had a -- on the range of the guidance, you had a $60 million range last quarter. And it looks like this quarter it's a $50 million range. You just came in at the low end of guidance. There's obviously some seasonality you saw in September. So I guess my question would be why not maintain a $60 million range here for December given that, who knows, maybe there's some seasonality that bleeds over into December. Or do you have a higher level of confidence in the pipeline going into December than you did in September?

I think we've tempered our guidance given some of the seasonality and things that happened last quarter per se. And then obviously we feel, like I said, a little bit more better with the strong seasonality that happens this quarter.

Okay. So you don't feel like you need to -- because you came at the low end of the range for September, you don't feel like you need to increase your discount rate or maybe you already have in the December guide?

That's why the range is smaller.

Okay, fair enough. And then on the gross margin, obviously you did very well with the server, which are higher-margin, but a sequential decline in revenue probably hit margin on the other side. So as we think about December margin levels, how should we think about the mix between servers and subsystems? I imagine December is probably a good server quarter, fully configured systems. Is that the right way of thinking about it?

I guess where margin is concerned, this quarter should be slightly stronger than last quarter. Part of the reason, because last quarter, we faced some components price drop, especially DRAM. That happened in last quarter and this quarter, we feel should be at least slightly better.

Okay. And Howard, just on the tax rate here, I think a lot of us were not modeling 34% for the rest of the year and into the out year. That's probably some disconnect between the Street's numbers and what you guys guided to for Q2 here. So the question is should we just assume 34% for the rest of the year until we are told otherwise, or how should we think about that, because they are obviously going to impact leverage on the bottom line?

Of course. Alex, as I alluded to, like I said, part of the difference between, say, our prior years of about 30-odd% is because of the R&D tax credit. And quite frankly, I've told folks basically we don't know how to handicap when the R&D tax credit there are the tax credit might be back. Like I said, if it happens this quarter, it could be up to about a 7% change in our tax rate if it gets passed like it did last year. But again, we haven't built that in and, quite frankly, I can't -- I haven't built that in going forward.

Okay. And just last question here. Just there's no surprises when March rolls around and you guys give guidance for that. Every year you had some sequential decline in the March quarter just due to seasonality, or at least last year you did. The year before, you didn't because of some strong cloud business. But how should we -- would you expect, based on what you know now, some seasonality in the March quarter?

I think it is seasonal Alex. It's still seasonal. We've still seen that over the years. Obviously, we had some good projects and good products coming out there that will help us -- in the past have helped us go beyond what the seasonality has been.

Also, another factor is new products. As you people may know, Intel has -- Huawei are coming early next year. And we, as a civil matter, we just announced a strong storage product line about last month. So all of those will help us grow our profitability and revenue for December quarter and the next coming years. Kind of like our own (inaudible) our CTP, our 1U 4 GPU and 2U [NVME]. So that will be opening good news.

All right. Thank you guys.

Nehal Chokshi, Maxim Group.

First, what percent of revenue does China represent in fiscal year 2015?

We haven't broken it out specifically. It's still a majority of the revenues. We have not broken it out separately, Nehal.

The majority of APAC you mean, right?

Yes.

Yes, okay, all right. Okay, so subsystem, year-over-year growth, it looks like that was down -- I'm sorry, subsystem year-over-year unit growth was down 27% year-over-year. Is this all attributable to the issues you saw in China, or is there more to it than that?

Yes, kind of portion affected by China, but also more customers like to buy our completed solution.

Oh, I see. Okay.

(multiple speakers)

Right. Okay. And then, finally, your DSOs did go up substantially Q-over-Q and year-over-year. Is that purely an effect of customer mix? I.e. you did have a very significant uptick in the Internet data center. Or was there also the effect of the weakness at the end of the quarter that also drove that? And then, given that context, you alluded to greater confidence for the December quarter, but that doesn't mesh well with that rise in DSO.

We saw a strong move in our storage solution. And when people buy our storage solution, a big portion of them move to completed solution. In storage system, you already have a higher ASP than service system. That's another factor.

Okay. I will cede the floor. Thank you.

Brian Alger, ROTH Capital Partners.

I want to stick on storage if we can. Obviously, good year-on-year growth. I'm wondering if we could get an assessment in terms of how much of the total sales does storage make up now? And can you maybe give us some clarity in terms of next-gen storage as opposed to JBOD type of storage?

Yes, 22% is about the total percentage of revenues. I believe it was about 15%, 15% on the -- let me get back to you on that Brian. Just a second. Let me hold that for a second. We do see the growth in the areas, both in our traditional and in our next-gen storage, going very well for us.

We can see -- we started to see a new generation software at different storage growing very strongly with our customer base. And that's why we have a big product line. Again just as (technical difficulty) the last months focused on storage differentiation, including (inaudible) hybrid solution. Hyper-converging and some other solutions M&A.

Right. And just as a follow-up to that, obviously there's been a lot of disruption going on within the storage market, whether it's consolidation with some of the leaders or competitors of yours combining. As you look forward beyond this near term and we look at the pricing mechanisms and the capacity that your various vendors have, how should we think about your storage market and what it means to your gross margins? I recognize that, from a systems standpoint, they're relatively high ASPs, but one would imagine that if you are throwing a whole bunch of rotational storage, it doesn't have the best margin profile.

You know, we have been very aggressive and have a strong product for a new generation software defined storage. And we have a strong product line. Again, we just started to announce last month for 90P 4U and 4U CTP and 2U for DAP. So all of those will grow the value. So at least the net profit will grow. And as to gross margin, I believe will be slightly improving as well.

Great. Thanks guys. I will cede.

Rich Kugele, Needham Company.

Okay, so a few questions as to round out was been asked before. Can you just clarify? So you, Howard, you were saying that you are only to be doing an SAP deployment this quarter in both Asia and in Europe? Is that correct? Are you doing them both at the same time?

Yes, we just completed our US SAP rollout in July, in the first week of July, and so we are now following that up with our Asia and European.

Okay. And what have you done to make sure that you don't have any of the hiccups you had in the US?

Our people are really done here (laughter) (multiple speakers) so now we are able to train our people in Asia and Europe much more efficiently. So I believe the deployment in Asia and Europe should be much more smooth.

Okay. And then what is your target? Given some of the changes in your mix, the greater percentage of full service systems, the greater percentage of storage, what is the right way to view the balance sheet metrics nowadays? Because we do get quite a bit of questions around this. What is your target cash cycle days, and what do you think is necessary from an inventory perspective to have the proper parts on hand? Any update there?

I think, Rich, we told you folks that I think the mid-80s% for cash conversion cycle days is still what we are holding to and targeting for ourselves, is what we've talked about --

Okay and --

-- in the inventory area, I'm sorry. And in cash conversion cycle days, you have seen us in about the mid-70s% or so and it's propping up a bit. But again if you look at some of the seasonality, it always seems to kind of smooth itself out.

In the AR side of it, I think, as we penetrate more enterprise and some of these global 1,000 customers I have talked to you guys about, our DSOs on AR possibly increasing there. So again, we will see some uptick there, and then hopefully we will be managing our payables and our inventory a bit better to bring it down.

Okay. Then, just lastly, storage has grown so much. Is all of that from previous wins or have you added any new customers in the quarter?

Both. All customers continue to grow basically and sometime we also gain more new customers. Again, our strategy is to make sure Supermicro is actually the best storage server hardware company. So, we are always welcome to work with old partners and new partners.

Excellent. Okay, thank you.

Mehdi Hosseini, SIG.

Just a couple of quick follow-ups. On storage, can you provide the mix of legacy and next-gen storage?

Basically, the new generation storage is growing faster for sure, especially --

What would it be for the September quarter?

For September, Howard, do you have that number?

For the September quarter, Mehdi, again, roughly about $44 million of $113 million was traditional -- I'm sorry next-gen, and about $70 million -- $69 million was traditional storage.

Okay, great. And then my last follow-up, when I look at your revenue per headcount and operating profit per headcount, it seems like there has been a sequential year-over-year decline, especially as you expand your capacity in California. I'm going back to my --

Two reasons. One is we are expanding our new facility aggressively. So we had to hire people to train people, especially where quality (inaudible). And at the same time, we are also growing strongly in system solutions. So we hire more solid engineers, system engineers, and owe our growth from that. That day you hire to the day they contribute takes some quarters. So that's kind of a good investment but yes, for short term, it shows some prudence.

Sure. Actually, I was going to ask you about your confidence in scaling the incremental cost added. It seems to me that China was down in the reported quarter and most of your leverage to the key customers are outside of China and in the US. So what gives you the confidence that you are going to be able to bring the volume and be able to improve profitability?

Since early this year, there has been some fluctuation. And earlier in the year, we had the port factor and now we have seen, for the September quarter, some push-out. And then looking into March, there is some seasonality. And I'm just trying to get a feel for whether fiscal year could be backend loaded in terms of that 20%-plus growth rate for fiscal year. And if it's backend loaded, what gives you confidence that the volume is going to come in?

I guess a few factors. Number one, steel products. That's why I mentioned, since last month, we introduced some very advanced products and continue in the next few months, almost every month, we will have a new product available. And then Q1 (inaudible) but where available. That's the product side.

And other than that, we are also growing very aggressively in the East Coast. As you may know, we just had an East Coast office open two weeks ago in Newport?

New Jersey.

New Jersey. And also we are growing very aggressively in the Midwest, including the Chicago area, and so as in Europe. So we did also our investment in territory, in product, and those for sure will be very positive to our business in the near future.

Got it. Thank you.

Aaron Rakers, Stifel.

Thanks. I have to follow up as well. So, a couple of quick questions. So, first of all, I'm just curious of what, with the variables involved in the operating expense line, I think it was a $1.4 million impact from the marketing examination this last quarter, what are you assuming on the operating expense line this quarter, and how should we model that over the next couple of quarters?

I think we went through our annual salary increase. So if you start off as a baseline there, you take off some of the unusual expense let's say for the investigation that we got into the marketing expense, you take that off per se there, and then air out some of the foreign exchange gain, then you get to a baseline where we start at about $47 million this quarter. I think if you start down at the baseline and look from there going up little bit, I think that's a fair baseline.

So $47 million this quarter is kind of the right number to be thinking about.

In the September quarter, that's where we ended up. And so up from there a bit.

Okay. Okay. And then just real quickly on -- I'm just curious. I know that you had provided some color on the breakdown of the storage categories. Can you help us understand how fast the growth has been in your new/emerging stores categories relative to the traditional? And also would you mind talking a little bit or disclosing the growth rate or decline that you saw in the high-performance computing vertical?

For storage, we just shared, right? Year-over-year, we grew about 60%. So, I believe, for the next 12 quarters -- next 12 months, our storage will continue to have a very strong growth. If another 50%, 60% or up, that won't surprise me. So that's for storage.

Okay. And the HPC vertical?

HPC, I believe we have gradually smooth growth. Not as fast as storage, but we are continuing to grow.

And what was the HPC growth this quarter?

HPC roughly was about, this quarter, year-over-year, was actually down a bit, sequentially about 11%.

Okay. Thank you.

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

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 Supermicro first-quarter fiscal year 2016 conference call. We do appreciate your participation. You may now disconnect. Thank you.