Super Micro Computer, Inc.
Q1 2016 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

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 & 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 the 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'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

[Perry G. Hayes:]

Good afternoon and thank you for attending Super Micro's conference call on financial results for the first quarter 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 & Presentations tab. Before we start, I'll remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these 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 Super Micro'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 three of this presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release, and in the supplemental information attached to today's presentation. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

[Charles Liang:]

Thank you, Perry, 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. Super Micro'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 effect, combined with weaker European and Asia business activity and some customer push-out. We usually expect a seasonal effect in the summer quarter, due to the summer holiday. Nonetheless, first quarter revenue was 19.6% higher year-over-year. That represent 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 40.3%. The rest of Asia was up 6.5% year-over-year, and up sequentially by 15.6%. Once again, with 19.6% growth in a seasonally weak quarter, we are off to a strong start for meeting our fiscal 2016 gross target, at over 20% growth rate. This is supplemented by the fact that we had achieved new high with our direct customer billings, which accounted for 55% of our total revenue to date. Server and Storage Systems account for 69.2% of total revenue, which is also high – a new high. This encouraging fact has shown that our customers are gravitating towards our higher-value completed system and total solution offerings, which does say (6

[Howard Hideshima:]

Thank you, Charles, and good afternoon everyone. I will focus my remarks on earnings, gross margin, operating expenses, and similar item 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 the review of the first quarter income statement. Please turn to slide seven. 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 Server Solutions which result 43.5% led by our growth in Cloud/Internet datacenter of 116.7%, and Storage of 60.3% year-over-year. On a geographic basis we had strong growth in the U.S., 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 datacenter business grew 47.3% which benefited both our OEM direct customers and complete server numbers. Slide eight. Turning to product mix, the proportion of revenues from server 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 $4200 per unit, which is up from $3600 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. Cloud/Internet Datacenter 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 U.S., and 45% from our distributors and resellers. Slide nine. 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 Abelcom resulted in no-basis-point change to gross profit in the quarter with total purchases representing approximately 13.2% of 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 and fleet/server solutions, the continued growth of X10 Haswell-based solutions, and stronger vendor relationships were positive to margins. This was also in part by higher Cloud/Internet Datacenter sales, which typically have lower margins. Gross margin sequentially was the same. Higher sales of Complete Server Solutions as well as the continued growth of X10 Haswell product 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 margin. Operating expenses were $47.1 million, up from $34.8 million in the same quarter a year ago and up from $45.3 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 development of our Total Solution and the lack of $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 higher foreign exchange gain of $1.8 million. The company head count increased by 116 sequentially to 2401 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 52,042,000. 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 the December quarter. 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 in 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 decrease in accounts receivable of $25.4 million, net income of $20.5 million, and an increase in income tax payable of $6.8 million; offset in part by a decrease in accounts payable of $37.7 million an increase in property, plant, and equipment of $7.7 million, mainly related to the (20

[Charles Liang:]

Thank you, Howard. With the 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 remains intact. With our robust products and service, we are well positioned in the key growth geo and markets, and we will move ahead with our strategy for greater success this year. Operator, at this time, we are ready for questions.

[Operator:]

Thank you, sir. . And we'll go first to Mehdi Hosseini with SIG.

[Mehdi Hosseini:]

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

[Howard Hideshima:]

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

[Mehdi Hosseini:]

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?

[Charles Liang:]

Indeed, our growth in Japan and Korea is getting very strong. And also, we plan to support Europe from Asia directly, for key account (25

[Mehdi Hosseini:]

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

[Howard Hideshima:]

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

[Mehdi Hosseini:]

Yeah, thank you.

[Howard Hideshima:]

Mehdi, just to 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.

[Mehdi Hosseini:]

Got it, thanks.

[Operator:]

And we'll take our next question from Mark Kelleher with D. A. Davidson.

[Mark D. Kelleher:]

Great. Thanks for taking the question. 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 the growth?

[Charles Liang:]

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

[Mark D. Kelleher:]

Are you seeing increased competition there from Lenovo?

[Howard Hideshima:]

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

[Mark D. Kelleher:]

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

[Howard Hideshima:]

Yes.

[Mark D. Kelleher:]

Okay. Thanks.

[Operator:]

And we will list our next question from Aaron Rakers with Stifel.

[Aaron Rakers:]

Yeah, thanks. 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. A 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 kind of 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 in to your expectation on the next couple of quarters?

[Howard Hideshima:]

Yeah, Aaron, I think we 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 regard to the rest of Asia, it has some very good potential out there in Japan and in Korea and other places, so there are great areas for us to continue to grow out there in the Asia area.

[Aaron Rakers:]

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?

[Charles Liang:]

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 (30

[Aaron Rakers:]

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

[Charles Liang:]

Thank you.

[Operator:]

And we move to our next question from Alex Kurtz with Sterne CRT.

[Alex Kurtz:]

Hey, guys can you hear me okay?

[Charles Liang:]

Yes.

[Alex Kurtz:]

Okay. 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 in October? Did I hear that right?

[Charles Liang:]

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

[Alex Kurtz:]

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

[Howard Hideshima:]

Yeah, I think – Alex, like I said, seasonality was probably the main thing that we had driving the quarter per se, okay?

[Alex Kurtz:]

Okay.

[Howard Hideshima:]

So again push-outs weren't the main – the majority.

[Alex Kurtz:]

We know how to chase that. So just a question on the range here, Howard, I think last quarter you had – on the range, 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 at the lower end of guidance. There's obviously some seasonality you saw in September. So I guess my questions 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 is it you just have a high level of confidence in the pipeline going into December than you did in September?

[Howard Hideshima:]

I think we 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 more better with the strong seasonality that happens this quarter.

[Alex Kurtz:]

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 this December guide?

[Howard Hideshima:]

That's why the range is smaller.

[Alex Kurtz:]

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

[Howard Hideshima:]

I guess the margin concern, 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 it should be at least slightly better.

[Alex Kurtz:]

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. I mean that's probably some disconnect between the street's number and what you guys have 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 that's obviously going to impact leverage on the bottom line.

[Howard Hideshima:]

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, right?

[Alex Kurtz:]

Yeah.

[Howard Hideshima:]

And quite frankly, I've told folks basically that we don't know to handicap when the R&D tax credit – that R&D tax credit might be back, like I said. But if it happens this quarter, it could be up to about 7% change in our tax rate if it gets passed like it last year. But again we haven't built that in, and quite frankly I can't – I haven't built that into – going forward.

[Alex Kurtz:]

Okay. And just last question here, just so there's no surprises when March rolls around and you guys give the guidance for that, every year you've had some sequential decline in the March quarter just due to seasonality. Well, at least last year, you did; the year before, you did; 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?

[Howard Hideshima:]

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

[Charles Liang:]

Yeah. Also, another factor is (35

[Alex Kurtz:]

All right. Thank you guys.

[Operator:]

And we'll take our next question from Nehal Chokshi with Maxim Group.

[Nehal Sushil Chokshi:]

Thanks. Have a few questions. First, what percent of revenue does China represent in fiscal year 2015?

[Howard Hideshima:]

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

[Nehal Sushil Chokshi:]

Majority of APAC, you mean, right?

[Howard Hideshima:]

Yeah.

[Nehal Sushil Chokshi:]

Yeah, 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?

[Charles Liang:]

Yeah, kind of a portion affected by China, but also more customer like to buy our completed solution.

[Nehal Sushil Chokshi:]

Oh, I see. Okay.

[Charles Liang:]

(37

[Nehal Sushil Chokshi:]

Right. Okay. And then finally, your DSOs did go up substantially Q-o-Q and year-over-year. Is that purely an effect of customer mix – you did have a very significant uptick in the Internet Datacenter? 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 rising DSO.

[Charles Liang:]

We saw a strong move in Storage solution. And when people buy our Storage Solution, a big portion of them move our completed solution. And Storage system usually have a higher ASP than services. That's another factor.

[Nehal Sushil Chokshi:]

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

[Operator:]

And we'll take our next question from Brian Alger with ROTH Capital Partners.

[Brian Alger:]

Good afternoon, guys. 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?

[Howard Hideshima:]

Yeah, 22% is about the total percentage of revenues. Believe it was about 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.

[Charles Liang:]

Yeah. But we started to see a new generation (39

[Brian Alger:]

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 system standpoint, they're relatively high ASPs, but one would imagine that if you're throwing a whole bunch of rotational storage, it doesn't have the best margin profile.

[Charles Liang:]

We have been a very aggressive, and have a strong product for new generation software-defined storage. And we have a strong product line. Again, we just start to launch last month for a 90-bay 4U and 4U 60-bay and 2U 48-bay. So all of those will grow the value. So at the least, the net profit will grow. And as to the gross margin, I believe we'll be slightly improving as well.

[Brian Alger:]

Great. Thanks, guys. I'll cede.

[Operator:]

And we'll take our next question from Rich Kugele from Needham Company.

[Rich J. Kugele:]

Thank you. Good afternoon. Can you hear me all right?

[Charles Liang:]

Yes, Rich.

[Howard Hideshima:]

Yeah we can.

[Rich J. Kugele:]

Right. Okay. So, a few questions, just to round out what's been asked before. Can you just clarify – so you – Howard, you were saying that you were going 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?

[Howard Hideshima:]

Yeah. We just completed our U.S. SAP rollout in July, in the first week of July. And so we're now following that up with our Asia and European.

[Rich J. Kugele:]

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

[Howard Hideshima:]

Well, I think...

[Charles Liang:]

(41

[Rich J. Kugele:]

Okay. And then, what is your target given some of the changes in your mix, the greater percentage of the (42

[Howard Hideshima:]

Yeah, I think, Rich, we have told you folks that I think the mid-80s before cash conversion cycle days is still what we're holding to and targeting for ourselves is what we talked about.

[Rich J. Kugele:]

Okay, (42

[Howard Hideshima:]

In the inventory area – I'm sorry. And in the cash conservation cycle days, you've 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, always keeps trying to smooth itself up. In the AR side of it, as we penetrate more enterprise and lock some of these global 1,000 customers, I have talked to you guys about our DSOs on AR possibly (43

[Rich J. Kugele:]

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

[Charles Liang:]

Both. The old customers continued to grow, basically, and at the same time, we also gained more new customer. Again, I'll state here to make sure (43

[Rich J. Kugele:]

Excellent. Okay. Thank you.

[Charles Liang:]

Thank you.

[Operator:]

And we'll move to our next question from Mehdi Hosseini with SIG.

[Mehdi Hosseini:]

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

[Charles Liang:]

Basically, the new generation Storage is growing faster for sure. As mentioned...

[Mehdi Hosseini:]

What would you put at the September quarter?

[Charles Liang:]

For September, Howard, do you have a (44

[Howard Hideshima:]

Yes. For the September quarter, Mehdi, again roughly about $44 million of $113 million was next-gen, and about $69 million was traditional Storage.

[Mehdi Hosseini:]

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

[Charles Liang:]

Two reasons. One is we are expanding our new facility aggressively. So we had to hire people to train people, especially with quality system conversion (45

[Mehdi Hosseini:]

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 with the key customers are also in China and in U.S. So what gives you the confidence that you're going to be able to bring the volume and be able to improve profitability? Since early this year, there has been some fluctuation, and early in the year we had the port factor, and now we had -- we've 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 back-end loaded in terms of that 20%-plus growth rate for fiscal year, and if it's back-end loaded, what gives the confidence that the volume is going to come in?

[Charles Liang:]

I guess a few factors. Number one, still, products. I mean that's why I mentioned since last month, we introduced some very advanced product and continue in next few months. Almost every month we have a new product available. And then Q1 (47

[Mehdi Hosseini:]

Got it. Thank you.

[Charles Liang:]

Thank you.

[Operator:]

And we'll take our next question from Aaron Rakers with Stifel.

[Aaron Rakers:]

Yeah. Thanks. I had a follow-up as well. So a couple of quick questions. So first of all, I was 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?

[Howard Hideshima:]

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

[Aaron Rakers:]

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

[Howard Hideshima:]

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

[Aaron Rakers:]

Okay. And just real quickly on – just curious. I know you had provided some color on the breakdown of the Storage categories. Can you help us understand how fast the grown has been in your new/emerging Storage categories relative to the traditional? And also would you mind talking a little bit or disclosing the growth rate or decline that you saw on the High Performance Computing vertical?

[Charles Liang:]

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

[Aaron Rakers:]

Okay. And the HPC vertical?

[Charles Liang:]

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

[Aaron Rakers:]

What was the HPC growth this quarter?

[Howard Hideshima:]

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

[Aaron Rakers:]

Okay, thank you.

[Operator:]

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

[Charles Liang:]

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.

[Operator:]

Thank you, ladies and gentlemen. That does conclude the Super Micro first quarter fiscal year 2016 conference call. We do appreciate your participation. You may now disconnect. Thank you.