超微電腦 (SMCI) 2021 Q3 法說會逐字稿

Good day thank you for standing by.

Welcome to the Super Micro Fiscal Q3 2021 Earnings Call.

(Operator Instructions)

I would now like to turn the conference over to your host, Ms. Nicole Noutsios.

Good afternoon and thank you for attending Super Micro's call to discuss financial results for the third quarter of fiscal 2021, which ended March 31, 2021.

By now you should have received a copy of the news release from the company 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 may refer to a presentation that is available to participants in the IR section of the company's website under Events and Presentations tab.

We have also published management scripted commentary on our website.

Please note that some of the information you hear during the 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 the potential impact of COVID-19, the company's business and results of operations.

There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations.

You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2020 and our other SEC filings.

All of these documents are available on the IR section of Super Micro's website.

We assume no obligation to update any forward-looking statements.

Most of today's presentation, refers to non-GAAP financial results and business outlook.

For an explanation of our non-GAAP financial measures, please refer to the accompanying 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 in today's presentation.

At the end of today's prepared remarks, you will have a Q&A session for sell side analysts to ask questions.

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

Thank you, Nicole, and good afternoon everyone.

Last quarter, we have performed our growth strategy well by winning new key customers, expanded our global operations and introduced a whole new generation of products.

Today, we have released our fiscal 2021 third quarter financial results.

Let’s take a look at some highlights.

Our fiscal third quarter net sales totaled $896 million, up 16% year-over-year and up 8% sequentially.

For the first time in our company history since IPO, the revenue from seasonally weak March quarter significantly surpassed that of December quarter.

Our fiscal third quarter non-GAAP earnings per share was $0.50, above the midpoint of our previously guided range of $0.37 to $0.57.

In this quarter, we also generated a record revenue from the Asia Pacific region, demonstrating our continued and expanding traction in Asia.

We continue to execute our 3-year growth strategy highlighted in our recent investor update on March 4. Our progress, judged by historical industry growth rates, has propelled us to resume the position of the fastest growing U.S.-based server/storage manufacturer.

More importantly, we achieved all this despite so much of our focus having been on growing the company's long-term foundation.

Earlier this quarter, we introduced the industry's most comprehensive server portfolio leveraging the latest processors from both Intel and AMD.

Our application-optimized solutions are gaining traction among the world's most advanced datacenters and enterprises.

We have several committed early ship customers that have deployed thousands of server units, led by our SuperBlade.

We also seeded out optimized systems for many verticals such as artificial intelligence, telco, cloud and more.

One successful example is our collaboration with Osaka University in Japan with our liquid-cooled HPC solution, which takes full advantage of the new powerful Ice Lake processors.

Hundreds of other customers have already utilized our early sampling program or accessed the new systems online through our JumpStart program.

These activities should accelerate the deployment ramp of this new generation of products and propel growth for this calendar year.

In addition to the systems based on the new CPUs, we released an innovative new GPU system architecture last quarter with resource savings in mind.

With very strong global demand, the optimized 2U 2-node GPU solution delivers great cost savings, utilizing shared power and cooling.

This 2U 2-node system supports 3 double-width or 6 single-width PCIe Gen-4 GPUs, and is the best platform for video streaming, high-end cloud gaming, and countless social networking applications.

We have been executing a robust manufacturing plan in Taiwan for a few years.

With attractive new product lines and strong customer demand, we recognize the importance of optimizing operational efficiency and reducing cost, especially with a tighter supply chain.

As one of the key elements of our strategy, our Taiwan campus expansion will increase our capacity and capabilities in production, operation, engineering, and sales to deliver more cost-optimized offerings.

Manufacturing cost has been our painful challenge since company was founded 27 years ago.

Now with the new 1 million square feet of manufacturing and office space added to our Taiwan campus this summer, we will become more profitable by having more control over our global supply chain and manufacturing cost.

The U.S. campus expansion, which will be online shortly after the completion of the Taiwan expansion, will focus on similar operational goals but with more emphasis on security and Made-In-U.

S.A.

initiatives.

Again, these expansions will position us well to handle the ongoing logistics challenge and rising costs while further improving our time-to-market advantages and production scale and agility.

We are making progress in the key growth factors, as I mentioned in our recent investor event.

And we are getting great traction within the critical segment of Cloud Datacenter and Enterprise accounts.

We are securing new design wins and seeing expanded orders from certain high-profile customers.

These customers are choosing Super Micro based on the breadth of our portfolio and our ability to deliver the best optimized system for their 5G, telco, AI, and both public and private cloud workloads.

We have been efficiently growing our high-profile accounts worldwide, and we aim to double these accounts in the coming 2 years.

Our high-profile customer initiative is a big portion of our organic growth strategy that has evolved and been fine-tuned over time.

We also continue our sales transformation effort to broadly launch our B2B/B2C automation with the auto-configurator tool, which is already in use with many selected customers.

This tool will make it much easier to share communication, technical data and product configurations among our sales, engineers, and customers, which I believe will accelerate revenue and reduce fulfillment time and cost.

Strong positive momentum is building again at Super Micro.

I believe our Q3 growth is just the beginning of our journey to gain more market share again.

We are returning to our hallmark of consistent growth.

To align my interest with the company's growth strategy, the Board of Directors accepted the proposal of reducing my annual salary to $1 and added an equity compensation package tied to very aggressive revenue and stock price targets.

Also in our recent investor update, I talked about our path to $10 billion in annual sales in 3 to 6 years.

Now I have even stronger confidence to achieve this goal.

Over the past year, Super Micro has had successes in various market segments such as Storage, HCI, Cloud, AI, Machine Learning, 5G/telco and others.

We have established our technology leadership through optimized server and storage solutions.

I am excited that our recent booking activities, along with our capacity expansion initiatives and improving COVID outlook, give us the confidence to provide a strong Q4 guidance.

Our coming fiscal Q4 revenue should surpass $1 billion, in the range of $980 million to $1.08 billion.

Super Micro is finally back on track for faster growth, and I am confident that our growth rate will be getting faster and faster in the coming quarters and years.

I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional details on the quarter and our outlook.

Thank you, Charles.

Since moving to the CFO role at Super Micro last quarter, I am even more excited about the future of the company than when I joined in 2018.

We continued to execute in all major areas of the company this quarter and are pleased with our results and outlook.

Our fiscal third quarter revenue totaled $896 million.

This reflects a 16% year-on-year increase from the same quarter of last year and an 8% increase from the second quarter of fiscal year 2021.

Systems comprised 77% of total revenue and the volume of systems and nodes shipped were up sequentially and year-over-year.

System ASPs also increased year-over-year and quarter-over-quarter.

Geographic performance was strong across all major geographies.

On a year-over-year basis, the U.S. increased 18%, Asia increased 29%, Europe increased 3% and Rest of World decreased 12%.

On a sequential basis, U.S. sales increased 8% quarter-over-quarter, Asia increased 28% and Europe increased 5% with the Rest of World decreasing 46%.

From a customer point of view, we saw increases in sales to large data center and AI customers.

From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis.

So working down the P&L, Q3 gross margin was 13.8%, down year-over-year and quarter-over-quarter.

In our February earnings call, we stated that we expected gross margin to decline approximately 120 to 160 basis points sequentially due to the lack of a Q2 discrete cost recovery of that and product mix.

Due to very high demand in our -- for our products and in our supply chain, we incurred higher transportation and other additional costs.

I will further address this in the outlook, as we do expect some of these cost headwinds to abate in the coming quarter.

Turning to operating expenses, Q3 OpEx on a GAAP basis increased 7% quarter-over-quarter and decreased 10% year-over-year to $106 million.

On a non-GAAP basis, operating expenses increased 6% quarter-over-quarter and increased 9% year-over-year to $95 million.

Recall, last year’s operating expenses were offset by $9.5 million related to a joint product development related settlement fee, but after removing this benefit, Q3 OpEx would have been down 1% year-over-year.

As outlined in the February earnings call, the sequential increase in non-GAAP OpEx was primarily due to higher payroll taxes and increased R&D product development costs due to the heightened new product activity from Ice Lakes products from Intel, the Milan product from AMD and A100 products from Nvidia.

Other Income & Expense excluding (sic) [including] interest expense recorded a $1.4 million gain as compared to a $3.1 million loss last quarter.

The sequential change is mostly related to FX.

This quarter our tax gain was $0.2 million on a GAAP basis and an expense of $2.2 million on a non-GAAP basis.

Our non-GAAP tax rate was 7.6% for the quarter.

Lastly, our joint venture incurred a loss of $0.3 million this quarter as compared to a loss of $1.5 million last quarter.

Q3 non-GAAP diluted earnings per share totaled $0.50 as compared to $0.63 in Q2 of fiscal 2021 and $0.84 in the same quarter of last year.

Cash flow used in Operations totaled $124 million compared to cash flow from operations of $63 million in Q2.

CapEx totaled $19 million resulting in free cash flow used of $144 million.

Key uses of cash during the quarter included increases to inventory and receivables as well as capital return to shareholders through $43 million in share repurchases.

Our closing balance sheet cash position was $179 million, while bank debt was $85 million, resulting in a net cash balance of $94 million.

Turning to working capital metrics compared to last quarter, our Q3 cash conversion cycle was 86 days, that's down from 92 days, and within our target range of 85 to 90 days.

While the absolute level of our inventory increased, days of inventory at 99 decreased.

Days sales outstanding was 37 days, while days payables outstanding totaled 50 days.

Now turning to the outlook for our business.

We expect net sales for the fiscal fourth quarter ending June 30, 2021 in a range of $980 million to $1.08 billion.

We expect gross margins to increase approximately 70 basis points sequentially due to both product mix and improved management of our supply chain costs.

GAAP operating expenses are expected to be approximately $108 million and include $7 million in stock option compensation expenses and $2 million in other expenses not included in non-GAAP operating expenses.

We expect our non-GAAP operating expenses to be up modestly quarter-over-quarter, driven by lower NRE and continued investment in R&D with the rollout of the new product activity from AMD, Intel and Nvidia, previously mentioned.

We expect our GAAP and non-GAAP Q4 tax rate to be approximately 13% and approximately 16% thereafter.

We expect other income and expense, including interest expense, to total roughly $1 million and expect a nominal contribution from our JV.

We expect fully diluted GAAP EPS to be in the range of $0.56 to $0.77 and fully diluted non-GAAP EPS to be in the range of $0.70 to $0.90.

We expect CapEx for the fiscal fourth quarter of 2021 to be in the range of $15 million to $20 million, inclusive of our ongoing Taiwan building project.

So Nicole, I’ll turn it back over to you for Q&A.

Operator, we can start with questions.

(Operator Instructions) Your first question is from Mehdi Hosseini from SFG.

A couple of follow-ups.

I am just trying to better understand, as you look into the second half, especially given your strong revenue guide for the June quarter, how do you see momentum into September and December quarter?

And how do you see some of the demand drivers like new servers, CPU and other cloud or data center related drivers impacting your revenues into the second half?

And I have a follow-up.

Yes.

I mean, as you know, we had spent a lot of AFFO to engage high-profile accounts in last 3 months.

And I'd like to share we see that we achieved achievement.

So now we grow a lot of high-profile account.

And those accounts, lot of them start orders, and that's why we see March, we already have a strong quarter and then Q1, until the -- our June quarter was very strong, where it would be first time over $1 billion.

In September, still, we see that pipeline is strong as well.

As to the shortage, we’re working with our kind of long-term partner very closely and the shortage situation continue to be very tough.

But as of today, our promise -- the promise from our vendors have been pretty good.

So I feel pretty comfortable, although there are strategy everywhere.

Okay.

And in that context, how do you see increasing commodity prices?

For instance, storage and DRAM impacting your margin profile into the second half.

For most accounts, indeed our customer are happy to accept the higher price.

Basically, we [chip] what has been healthy margin and viable [tie-up] costs that we pay, most of the customers are happy to expect because it's kind of suppliers (inaudible).

So we were -- [ideal] customers who negotiated based on condition for our sale for our customers.

But additionally, the -- most of the customers understand and they expect that cost [rises].

Just a quick follow-up.

Have you been able to build a strategic inventory so that you would benefit from lower cost, as you think about the shipment over the next, let's say, 6 months?

Or do you have to continue to buy higher cost inventory and then you would pass on that incremental cost to the customer?

Well, it’s a big question.

Indeed, we understand that certainly it may happen since -- many months ago.

So yes, you are right, we had increased our inventory since -- I would actually say 3 months ago.

So we have been lacking in that area.

But still, our inventory is limited.

With our growing very strong at demand very soon -- I mean we had to kind of pay higher for new inventory.

Your next question is from Ananda Baruah.

Congratulations on the results.

I'm putting them up just after you've done the analyst event, so that's pretty exciting to see.

I guess a couple of follow ons to the direction that Mehdi was kind of asking questions.

Could you give a little more context in the key vertical areas where you're seeing the most pronounced order pick options?

I guess kind of, off the top of my head, I'm thinking hyperscale cloud customers versus large enterprise customers like on-premise and also the carriers for 5G, and I know there's new activity going on in all of it -- in each of those buckets.

So just interested in getting context to where you're seeing the most pronounced pickup, appreciate it.

And then I have a further follow up or 2. Thanks.

Yes, it’s -- again, we have been growing very well in 5G and telco.

So we started shipping some volume in March quarter, and we have more and more telco/5G customer continue to engage or start to grow [within] their demand.

That’s a very good sign to us.

And that part [went] very well.

Other than that, kind of like appliance for kind of semiconductor equivalent for other medical equivalent.

We also gained some good traction there in high performance cloud, especially private cloud and some HPC, especially HPC with new Ice Lake and Milan and Nvidia new GPU that consumes much more power than before.

And that's why I think cooling has been -- become our advantage as well.

So we started servicing lot of HPC customer with our very optimized, I think, including solution.

And Charles, in your prepared remarks, you mentioned accelerating revenue growth.

I think you said in the coming quarters as well as kind of in the coming years.

As I guess coming quarters, I don't want to pin you down too much, but should we expect -- can that occur over the next 4 quarters?

And how much -- I guess, do you have the -- it is a situation where you think like time line next few -- let's say, 4 quarters.

Do you feel like you have the account traction currently to do that?

Or does that involve new account work or sort of new penetration conversations inside of existing accounts that have yet to occur.

Actually, we saw that our existing account are growing their demand.

And that's why we have extended our capacity, especially in Asia quickly and with higher -- very high scale.

So also, we are again engaged in a lot of high-profile account in that (inaudible) and those have kind of started orders.

And we will continue to engage those high-profile accounts.

We have enhanced our sales team, including our B2B automation system.

There we have sales and [then] all put into sales effort.

So our sales can post more high-profile account now.

So I believe very strongly that growth will be speeding up quarter-over-quarter and year-over-year.

And last one for me, is it June -- if I am remembering accurately June, that the new Taiwan center is opening up for production.

June or July, we did not final it yet.

It can be either way.

Kind of depends on situation.

(Operator Instructions) Your next question is from Jonathan Tanwanteng.

Very nice quarter and nice to see that demand out there.

My first question is what kind of gross margins do you think you can get in the September quarter, and I know there's a lot of moving parts, but especially given the inflationary environment, your new facility coming online, which should lower your costs, you have the new sales tools, which improve your efficiency, I think you alluded also that you're burning through your strategic inventory to lower costs.

So I'm just wondering with all the puts and takes, do you think you can improve from the current quarter into the September quarter and beyond that.

Yes, I can say a little bit and tell you [part] of detail.

I mean March quarter, we had a lot of products shipped by air because our customer satisfaction had been our priority.

So we shipped some by air and a lot by -- via the production from our vendors.

So we faced some overhead there for March quarter.

And looking forward, for September, situation would have been much improved.

David, you can add something.

Yes, so as -- Jon, as we mentioned, the ASPs are up quarter-over-quarter and year-over-year.

So we were looking forward to improving our margins toward our target, as we outlined back on March 4 of 14% to 17%.

So I think that's our general guidance.

Okay, great, thank you for that.

And David, can you actually talk about your expected -- your expectations on cash flow, as we get through the next couple of quarters, I know you used a lot this quarter, expect to see buybacks as well.

But as demand ramps, do you see yourself using more cash?

Or do you think you'll really collect some of that back.

Just your general thoughts.

Sure.

That's a good question.

We -- because we returned $43 million back to the shareholders this quarter, in addition to growing accounts receivable and inventory, and so -- and also continuing our capital improvements in Taiwan.

So as we complete our build-out in Taiwan, the cash demands will abate over there.

And also, we've already grown our inventory now to over $900 million.

And so we expect that the growth rate of inventory is not going to be the same as it was during this quarter.

So this quarter was especially demanding because we had such a -- we had such high demand.

And so we don't -- the rate of acceleration will not be the same.

Do you think you'll be cash flow positive in the next quarter or after I guess some investments in Taiwan?

Yes, it's going to depend on our growth.

And so that's really what it comes down to is how is -- if we go.

If we exceed our growth target.

We will stop buying the stocks back for this quarter.

The reason is -- because our business, we’re growing strong, and we need more cash flow to preparing inventory.

Got it.

Good problem to have.

Last one from me.

I think on Intel call, they mentioned a bit more digestion in data center.

Are you seeing that at all in your Intel product lineup?

And if you are, is it your other products, the AMDs, the NVIDIAs that are driving the strength that you're seeing going forward?

Look -- overly hard.

We have a customer kind of require the servicing for Intel CPU, AMD CPU and NVIDIA GPU.

So at this moment, we feel it's hopefully a strong demand and also see some price changes as well this year.

Your next question is from Nehal Chokshi.

Congratulations on the strong results here.

It sounds like drivers of the 8% [beat] relative to midpoint guidance was the new customers are equally between cloud apps and the customers in AI.

Do these new customers come with the new products or is it using existing products?

It's a combination.

We have a lot of customers that need new GPU solution from Nvidia, right?

So that’s Nvidia new GPU and some is Ice Lake, some is Milan.

So yes, most growth, I believe will be with our new products.

But even existing product we see a strong demand.

The whole limitation is kind of a shortage.

So we are working very hard to improve that situation.

What about demand on the storage heavy side of things, next gen storage and JBOD storage?

I would say not to us, not as hard as AI and 5G/telcos, but still we see a strong demand.

Okay.

And then I think there's been a lot of discussion during the call about price inputs and that that's been an issue for a lot of companies out there.

It sounds like you guys have been able to sort that issue.

Just to be clear, is it because of the strategic inventory reserves?

Or is it because there's been a more favorable pricing environment such that you can pass on these input price increases to your customers.

First -- I mean that we have a long-term contract and relationship with our supplier.

That is helping us to keep the costs -- kind of moves or at least stable.

And yes, most of the customer also except our [pace] through cost.

So in both situations, I feel we are in good condition.

And is that what underpins the confidence and gross margin will tick back up in the June quarter.

No, gross margin pretty much because of shipping charge, especially some shipped by air.

As you know, other COVID-19 that ship by air, costs grew above -- got tripled.

I never believe on that.

In the last few quarters that was the situation.

And also, because our demand was strong, so we speed up the production and we -- in some cases, we had to pay extra to our vendors or to our own employee.

I'm showing no further questions at this time.

I would like to turn the conference back to the company for any additional or closing remarks.

Thank you, everyone, for joining us today and have a good one.

See you next time.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.