超微電腦 (SMCI) 2022 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Second Quarter 2022 Earnings Conference Call. (Operator Instructions). It's now my pleasure to turn the call over to Nicole Noutsios, Investor Relations. Please go ahead.

Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the second quarter, which ended December 31, 2021. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; Patrick Wang, President, East Coast and SVP, Strategy and Corporate Development; and David Weigand, Chief Financial Officer.

By now, you should receive a copy of the news release from the company that is distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company refer to a presentation that's available to participants on the IR section of the company's website under Events and Presentations tab. We have also published management's scripted commentary on our website.

Please note that similar information you'll hear during -- our discussion today will consist of forward-looking statements, including, without limitation those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook, including guidance for the third quarter and fiscal year 2022 and the full year 2022, and the potential impact of COVID-19 on the company's business and results of operations.

There are a number of risk factors that can cause Super Micro's future results to differ materially from our expectations. You can read more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2021 and our other SEC filings.

All of these documents are available on the IR page at Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation, 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 the supplemental information attached to today's presentation. At the end of today's prepared remarks, we'll have a Q&A session for sell-side analysts to ask questions. I'll now call over to Charles.

Thank you, Nicole, and good afternoon, everyone. Today, I'm pleased to announce our quarterly revenue of $1.17 billion for fiscal Q2 2022, which was 41% year-over-year growth, and our sequential growth was 14%. We have seen strong growth in all our key verticals and geographically despite a challenge from a global component shortage and COVID impact. More importantly, our total IT solution strategy have been empowering us to continuously gain market share, all thanks to our dedicated employees, powerful Server Building Block Solutions and finally, our faster-growing software products. With bigger TAM and potential from total IT solutions, I believe our growth trend will continue for many years to come and getting stronger quarter-over-quarter.

Now let's look at some key highlights from the quarter. First, again, our fiscal second quarter net revenue totaled $1.17 billion, up 41% year-on-year and up 14% quarter-on-quarter, at the higher end of our guidance range of $1.1 billion to $1.2 billion. It's Super Micro's fourth consecutive quarter of faster revenue progression as we continue our growth trajectory at multiple times the industry's growth rate.

Our fiscal second quarter non-GAAP earnings per share was $0.88 compared to $0.63 in the same quarter last year, which was 40% growth and at the higher end of our guidance range of $0.70 to $0.90.

All our major geographies contribute significantly to our year-over-year growth, especially in the APAC region, which grew 76% year-over-year. The Taiwan expansion boosts our APAC and EMEA growth momentum by providing additional capacity and lowering operational costs. We continue to expand our B2B auto-configurator program to service significantly more customers during the quarter.

our innovation command center based on online business system have been improving our sales, FAE, PMs efficiency as well as our key customer satisfaction. Recent market conditions present us with a better opportunity to accelerate our business transition from a hardware company to a total IT solution company.

The transition enables Super Micro to all 4 customers, higher value and product availability with optimal hardware, software, service, switches and more. Our results has shown that our outperformed -- we have outperformed our previous $10 billion annual revenue target timeline we shared a few quarters ago.

More encouragingly, we are observing diversified growth across our target verticals, which are a large enterprise AI, machine learning, cloud, 5G telco and IoT. Our design win and engagement with Fortune-listed customers continue to grow quickly with our total IT solutions.

Our push towards total IT solutions is benefiting Super Micro and our customers in multiple ways. Most notably, our customers will receive a higher-quality, plug-and-play products that are fully optimized, integrated and validated in-house.

This effort is also helping Super Micro and our customers mitigate the impact of the global supply chain disruptions by accurately forecasting building inventory in scale and prioritize with our strategic partner. As a result, our total IT solution dramatically improved our customers' time-to-market and increase Super Micro's value.

Our total IT solution is built upon a robust knowledge of system architecture and building blocks that can be optimized for most of the market verticals. With the rise of the Omniverse and Metaverse, we have recently introduced several new architectures to enhance our GPU product offerings.

Our new universal GPU architecture allows customers to choose the best CPU, GPU, switches and I/O configuration to fully optimize their applications and workloads, leveraging either Intel Xeon Scalable processors or AMD processor.

The Universal GPU system enable customers to standardize configuration in their clusters for the desired workload on a single platform. This unique versatile system support various GPU, including NVIDIA A100 GPUs, newly announced AMD MI200 series accelerator, many other FPGA products from different companies and other GPU from other companies. I'm glad to announce that we already have many major customers and industry leaders committing to this new platform. And the only major limitation is a supply chain challenge.

Partnering closely with leading technology providers in the emerging Metaverse and Omniverse ecosystem, Super Micro has doubled our GPU product line to supply this 3D and immersive workloads. Our 2U 2-node GPU system provides an optimal mix of CPU-to-GPU ratio with resource-saving features.

Our high-performance and highly configurable Hyper and Hyper-E servers support multiple GPUs in a single system and are ideal for use cases such as distributed AI inferencing application, content delivery, telco, micro data center, 5G core and many other mission-critical enterprise workloads.

Along with our NVIDIA A100 Delta and Redstone platforms, Super Micro's comprehensive AI system, building blocks support, everything from inferencing at an edge to a high-performance computing data center for the Metaverse or Omniverse kind of application and everything in between.

Last quarter, we have redefined our growth drivers to speed up our growth strategy, which including Subsystems & Components, Complete Systems, Total IT Solutions and 5S. Our Building Block and Complete System business have been stably growing over the decades with the help of our partners. And this still serves the backbone of our revenue growth.

With other large enterprise customer, top technology-leading partner and appliance customers' engagement, I would like to emphasize again that Total IT Solutions business is our new major growth driver now. Going forward, our investment in software products, service and networking will be the key to improve our margin and profitability in the coming quarters and years.

In summary, Super Micro is rapidly growing and transforming into a total IT solution company from a server hardware company. We are accelerating our design wins and market share again at a key large global customers, including enterprise, AI, machine learning, 5G telco, edge and IoT. And we are improving our profitability and replicating our market share success in the U.S. to APAC and EMEA with the completion of our APAC expansion and rapid production ramp in Taiwan.

Our new Command Center-based Auto-configurator and B2B automation platforms are improving our operation efficiency and customer satisfaction while accelerating our market share gains.

In closing, our 41% year-over-year revenue growth is a solid proof that Super Micro's business is taking off quickly now. I am confident that our market presence, TAM and profitability will continue to increase strongly, and we invest more -- as we invest more resource in software as a total IT solution company.

My team and I have been diligently executing our growth strategy and accelerating the timeline to [pull] in our $10 billion revenue growth. I will now pass the call to David Weigand, our financial -- Chief Financial Officer, to provide additional detail on the quarter.

Thank you, Charles. I'm pleased to report our third consecutive quarter of revenues exceeding $1 billion. We are seeing continued strength across all geographies and strong demand for our products and services, resulting in fiscal second quarter revenue of $1.17 billion, a 41% year-on-year increase and up 14% quarter-on-quarter. Our Q2 revenues were at the higher end of our guidance range of $1.1 billion to $1.2 billion. Revenues for the trailing 4 quarters, being Q3 of fiscal year '21 through Q2 of fiscal year '22, totaled $4.17 billion.

Super Micro's Q2 fiscal year '22 recorded revenue growth, was across all 3 of our market verticals, achieving $756 million in the organic enterprise and channel and AML vertical; $274 million in the OEM appliance and large data center vertical; and $142 million in the 5G, Telco and Edge/IoT vertical.

The 5G, Telco and Edge/IoT vertical more than doubled sequentially as new designs went into production. Systems comprised 84% of total revenue and subsystems and accessories represent 16% of Q2 revenues. The volume of systems and nodes shipped as well as the system node ASPs increased both year-over-year and quarter-on-quarter. On a year-on-year basis, Asia, including Japan, increased 76% as we saw continued growth with both new and existing customers. Europe increased to 39%. The U.S. increased 38%, and the rest of the world decreased 32%.

On a sequential basis, Asia, including Japan, increased 8%, the U.S. increased 14%, Europe increased 20% and the rest of the world increased 19%. The Q2 margin was 14%, which was up 60 basis points quarter-over-quarter from Q1 due to price discipline and a better product/customer mix. This increase was achieved in spite of our increased use of air freight and higher supply chain costs.

On a year-over-year basis, gross margins were down 240 points due to a discrete cost recovery event in Q2 of last year and higher freight and supply chain costs in the current year.

Turning to operating expenses. Q2 OpEx on a GAAP basis increased 3% quarter-on-quarter and 14% year-on-year to $113 million. On a non-GAAP basis, operating expenses increased 2% quarter-on-quarter and increased 15% year-on-year to $103 million. The year-on-year and quarter-on-quarter increases on a GAAP basis were driven by higher personnel costs and increased head count, higher stock compensation expense and lower research and development NRE credits. The year-on-year and quarter-on-quarter increases on a non-GAAP basis were driven primarily by higher personnel costs and the increased headcount in lower research and development NRE credits.

Other income and expenses include interest -- including net interest expense was a $1.8 million expense as compared to a $0.8 million expense last quarter. The sequential change is mostly related to a loss from remeasurement of our Taiwan dollar loans to a weaker U.S. dollar, so FX.

This quarter, the tax provision was $7.6 million on a GAAP basis and $10.9 million on a non-GAAP basis. Our non-GAAP tax rate was 18.5% for the quarter. Our tax rate for GAAP and non-GAAP purposes increased this quarter, primarily due to a change in U.S. tax regulations.

Lastly, our share of income from our JV was $0.2 million this quarter as compared to $0.4 million last quarter. Q1 non-GAAP diluted earnings per share totaled $0.88, which was near the high end of the guidance range due to higher revenues and gross margins, partially offset by higher operating expenses.

Cash flow used in operations was $53 million compared to cash flow used in operations of $135 million in Q1 as we continue to build inventory to be in a position to meet the increasing levels of large orders from our customers and to mitigate the impact of supply chain disruptions.

CapEx totaled $12 million for Q2, resulting in a negative free cash flow of $65 million. Key uses of cash during the quarter included increases in inventory and accounts receivable, offset by cash provided from increased accounts payable, customer prepayments and deferred revenue. We did not repurchase any shares in the quarter. Our closing balance sheet cash position was $247 million, while bank debt was $316 million as we drew down on our bank lines of credit to increase inventory levels as we ramped production of new platforms globally.

Turning to the balance sheet and working capital metrics compared to last quarter. Our Q2 cash conversion cycle was 98 days, up from 94 days in Q1, which is above our target range of 85 to 90 days due to the higher inventory levels. Days of inventory was 118, representing an increase of 4 days versus the prior quarter. Days sales outstanding was down by 4 to 37 days, while days payable outstanding was down by 4 to 57 days.

Now turning to the outlook for our business. We note that our Q3 March quarter typically has some seasonal impact from the Lunar New Year holiday, and we are also carefully watching impacts to our supply chain from COVID-related disruptions. We expect net sales in the range of $1.1 billion to $1.2 billion, GAAP diluted net income per share of $0.58 to $0.81, and non-GAAP diluted net income per share of $0.70 to $0.90 for the third quarter of fiscal year '22 ending March 31, 2022.

We expect gross margins to be up slightly from Q2 levels. Our GAAP operating expenses are expected to be approximately $118 million and include $8.5 million in stock-based compensation and $1.7 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense to be a net expense of roughly $2 million and expect a nominal contribution from our joint venture.

Non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D and higher personnel costs. The company's projections for GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 15%, a non-GAAP tax rate of 16.5% and a fully diluted share count of 54.5 million for GAAP and 56 million shares for non-GAAP.

The outlook for Q3 of fiscal year 2022 GAAP diluted net income per common share includes approximately $8.5 million in expected stock-based compensation and $1.7 million in other expenses net of tax effects that are excluded from our non-GAAP diluted net income per common share.

We are maintaining our revenue guidance range of $4.2 billion to $4.6 billion for the fiscal year '22 ending June 30, 2022, and our GAAP diluted net income per share outlook of at least $2.77 and non-GAAP diluted net income per share of at least $3.20. The company's projections for GAAP net income assumes a tax rate of 15% and a tax rate of 17% for non-GAAP net income.

For fiscal year '22, we are assuming a fully diluted share count of 54.1 million shares per GAAP and 55.6 million shares for non-GAAP. The outlook for fiscal year '22 fully diluted GAAP earnings per share includes approximately $37 million in expected stock-based compensation and other expenses net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal third quarter of 2022 to be in the range of $5 million to $8 million. Nicole, I'll turn it back to you.

Operator, we can now open the line up for questions.

(Operator Instructions). Your first question comes from the line of Ananda Baruah with Loop Capital.

Congrats on the ongoing momentum and the nice results, and congratulations on the good execution. A couple if I could. Any -- so how is linearity through the quarter, revenue linearity? And any context around new kinds of, like, new customer -- like customer expansion, workload expansion, things of that nature would be really helpful? And then I have a quick follow-up.

Yes. Thank you for the question. As you know, we're just migrating from a hardware solution company to a total IT solution company. So lots of customers like our complete solution for their total IT need. So we continue to gain some really large customers and some really a technology leader. So we are very happy, very excited to service more partner in the industry.

And I'll...

And -- yes, go for it.

Okay. I was just going to add that customer-wise, we had really good growth in the telco and the 5G/telco vertical.

Especially like Omniverse and Metaverse, lots of very exciting opportunity there.

Charles, do you think, it sounds like -- correct me if this is not an accurate interpretation. But is that to say that telco picked up incrementally in the December quarter and that new energy do you think is going to continue at least kind of March quarter, first half of the calendar year here?

I mean March quarter traditionally is our kind of soft season. But this year is different because we have very strong demand, especially likewise, say GPU, Metaverse, Omniverse, lots of opportunity there. And we already have some large engagement, just try to fulfill it in.

Okay. Great. That's helpful. A quick follow-up, Charles. Any comments on demand after the June quarter? And I just asked that since we're coming up on the second half of the year. Any context you can provide, second half of the calendar year, on your thoughts on demand?

Yes. At this moment, looks pretty [commendable]. Because of our strong product and total IT solution, lots of customers now have a big backorder with us. So we are increasing our backorder kind of in a very convinced way.

Your next question comes from the line of Mehdi Hosseini with SIG.

Just wanted to get a better understanding how you're managing the inflationary trend in component prices. Your inventory has gone up for 2 consecutive years and by about $350 million over the past 6 months. But when I look at your revenue guide for March and imply guide for June taking the midpoint of the fiscal year guide, it does suggest a sequential decline. And is that because you're not able to pass on extra cost? Or you've just been conservative despite the fact that you have built inventory? Or is there something else that I'm missing here? And I have a follow-up.

Yes. Indeed, I'm very happy we have a big inventory now with global supply chain difficulty. We build inventory based on our backorder. And at this moment, indeed, our backorder have been very strong. And the reason why we did not update the whole year revenue and earnings is just because there are still certain uncertainty -- there's still some uncertainty in terms of supply chain. Other than that, we feel very optimistic...

Go ahead. Sorry, go ahead.

Yes. Our inventory indeed happened to have in a very healthy, very conservative way.

Yes. And Mehdi, this is David. Just to answer your question, another question that you had. Our ability to pass on costs is really reflected in our increased gross margin. So those increased component costs are being passed on.

Got it. Okay. And then if I were to go back to the 3 buckets that you highlighted, organic, OEM and 5G/telco. Thanks for providing the dollar revenue contribution. Can you also give us sequential and year-over-year changes for each bucket?

So Mehdi, we didn't go back to the Q2 of last year, I don't believe. Although in our -- we have guidance in our -- the slides that we have by quarter. Yes, that's available on our website.

Okay. But can you -- maybe you can provide some qualitative comments as to which bucket was the strongest?

Absolutely. So our organic, enterprise and channel and AI/ML constitutes approximately 65% of our revenues. The OEM appliance bucket comprises about 25%. And then the data -- I'm sorry, the 5G/telco and Edge is about 10%. And that's up from 5% in the prior quarters, the 5G/telco and Edge bucket. So that's the way -- that's kind of been the trend over the past quarters. The big change was in 5G. Yes, it was from really -- from big growth and traction with telco customers.

Hey Mehdi, this is Patrick. I want to just come back to one thing that you mentioned earlier in your question, which is the implied guide for June. I wouldn't read what we've done here as implied guidance for June. What we said was we've given guidance for what we expect in March. Given -- just given our situation today, we're not -- we're actually just maintaining the full year guidance there. We feel very comfortable with it, of course, right? But we're not actually guiding another quarter out, which is why we just -- we kept it where it was.

And the thing -- yes, I'm sorry, this is David. I'll add to that, that we have a range. We put out a range of $4.2 billion to $4.6 billion. So we're very comfortable there.

Sure. If I may just quickly, there is also continued mismatch for components with supply and demand. There's still some mismatches. So would it be fair to say that you're also conservative given the mismatches of availability of components?

You can say that. Kind of the backorder is stronger, but we try to be fully conservative, in case...

Your next question comes from the line of Nehal Chokshi with Northland Capital Markets.

Congrats on the solid results and well above March Q guidance. This question has already been partially answered by Patrick. But let me put a little bit of finer point on this here. Why not at least narrow the fiscal year '22 revenue guidance range given that the unchanged midpoint guidance does imply effectively about flat year-over-year for the June quarter?

So our -- Nehal, our demand has never been stronger. And so we've obtained some new logos, new customers, which have designed in our products. And so we feel very strong about our backorder and our demand. But this is a market where supply also dictates your forecast. And so we have to be careful about forecasting 2 quarters out on supply. So that's really the reason for our range.

Understood. Okay. And then, yes, Slide 9 is great. I love the fact that we're getting 5 quarter back visibility into these 3 vertical markets. And it certainly does imply that 5G, Telco and Edge had a very significant year-over-year growth. And Charles, you mentioned that part of this demand is Metaverse Omniverse. Not too sure what Omniverse means, but I do know what Metaverse means. And I guess I was in an impression that Metaverse at least would go under the red category, i.e., large data center, not 5G/telco. Can you just give me a little bit more understanding as to why Metaverse is potentially falling into the telecom here?

Today, there are some really world-class companies, a big company come into Omniverse or Metaverse, right? So we have a very strong engagement with some of them. So in terms of AI, the GPU, Metaverse, we have a very strong backorder now, indeed, and just try to work out components to fulfill all of the demand. As to 5G/telco, it's relatively a new territory for us. We started 5G/telco about 3 years ago. And now we have many bigger engagement. So we are very excited for 5G/telco growth as well.

Okay. So to be clear, then the commentary about the strong demand for Metaverse is not related to 5G/telco, correct?

Not necessarily. It's kind of -- not much related.

Okay. Got it. And then so at the Investor Day about a year ago, you talked about the 5G/telco opportunity. There's long design cycles, long qualification cycles. And it does look like this quarter, the dam broke basically. What percent of your telecom customers that you're engaged with went from qualifying to production shipments?

A big portion. Indeed, as I just mentioned, we started 5G/telco about 3 years ago. And then we have a very strong engagement so far, and some of them start to move certain volume. Some of them will move good volume data. So it's a new territory, but we overall are very satisfied with a big engagement from those partners.

Okay. Great. And then my last question is that also on this vertical market, it does imply that the OEM appliance on large data center was up only 10% year-over-year. Why is that?

Indeed, we have some large engagement, and they are kind of high-value product line. As we mentioned, for really kind of meta scale data center, we are selective, but when those demand a high end, kind of high-value products, so we are indeed very excited. We started to gain some of those opportunities.

Also -- this is -- yes, I'll add that, that -- the large data center vertical, I think, is going to vary very a little bit by digestion, too, because we have some regular customers that are purchasing -- they'll purchase for 2 or 3 quarters, and then they'll take a pause. But the good thing about our business is that it's grown to the point where we have enough momentum in all areas that one vertical can offset the other.

Your next question comes from the line of Jon Tanwanteng with CJS.

Good quarter guys and the outlook, too, I'm very impressed. My question is, are inflation and supply chain headwinds still accelerating in Q3 for you and that's maybe matched by your pricing? Or is it roughly the same as Q2? And maybe as a subset of that, could you tell us where the friction is this quarter? If it's any different? And if you see any easing or things getting tougher?

The good thing is that most of our customers already get used to kind of take the responsibility for the extra cost. So that's why our gross margin or net margin will basically getting stabilized, including higher transportation charge, basically customer already accepted it.

Okay. Great. Any commentary on where the friction is in components and shipping?

Overall, the supply chain situation has been, I would have to say, gradually improving. Not much improving, but gradually improving. So we're getting -- feel more comfortable than last quarter or before, although is still a big concern, yes.

Got it. Charles, you spent a little time earlier in the call talking about the total IT solutions transition. Could you just tell us what the margin is like on a typical total IT solutions sale versus a historically pure hardware sale?

Okay. I mean the total hardware, and that's the model we have. As you know, we had to compete with a lot of competition -- a lot of competitors. But total IT solution, customer need lots of software and lots of security feature and kind of like a cloud plug-and-play, cloud composite driver, software and (inaudible). So we invest a lot in this territory in the last 3 years. And now we start to harvest the results. And we continue -- we will continue to invest more in software. So our kind of software value, total IT solution value will continue to grow. I would like to say, gradually, we may be able to add 1%, 2% or even 3% actual profit -- net profit to our revenue in the next few quarters or few years.

Okay. Great. And that was part of your Investor Day target within the target model, correct?

Yes.

Your next question comes from the line of Ananda Baruah with Loop Capital.

I have a couple if I could. Charles, just going back to your comments just a moment ago about component constraints that you actually -- as you said, they're actually becoming less constrained right now. So just a clarification.

(inaudible) are under control, but still some concern. Especially for a complete IT solution, right. Even -- sometimes you just have 1 component in shortage, and you cannot ship the whole product line, whole solution. So that's why it's improving but still a lot of concern.

Understood. Understood. Helpful. And then on the gross margin, you guys have talked about reaching 14% in June. So it sounds like you're tracking ahead of that. And then you guided sort of up sequentially. How like -- how should we think about gross margin kind of going forward post the March quarter, I guess, trajectory-wise and what are the puts and takes? Because I think you guys have talked about sequential up December, sequential up March and sequential up June to get to 14%. And so now that you're already there, can you give us some sense of what the personality gross margin should look like in the coming quarters? I appreciate it.

Yes. Basically, when our total IT solution become more mature, gross margin and net margin will consistently growing. That's benefited very solid direction. But in some time, and I hope it happens, sometimes when we engage with a large scale CSP or OEM in really higher revenue deal, that may impact our gross margin and net margin. Although it's lower our overall margin, but when it's positive to company, overall (inaudible). We Will still selectively take some [deal] out of it.

Your final question comes from the line of Mehdi Hosseini with SIG.

Just a modeling follow-up. If I take the $3.20 -- minimum of $3.20 EPS growth for FY '22 and assume $0.80 for March, then my June EPS would be up over $0.90. So you are expecting margin expansion from March to June. Is that the right way of thinking about to get to the $3.20 minimum EPS for FY '22?

Yes, basically, June always our kind of half season, right? So this year, I believe, same opportunity. June will be very strong quarter, I believe. And so as to gross margin, maybe a little bit lower. But if that happens, the net profit should be more than $0.90, maybe more than $1. David, you may add some comment there.

Yes, Mehdi. So we're very comfortable being inside 14% to 17%. That's our target. We've guided up for Q3 at higher margin. We said it should be up slightly in Q3. And for Q4, we're not giving updates on Q4. But for the full year, as we said before, very comfortable with the guidance that's out there because it's got -- it has a low range and a high range.

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.