Super Micro Computer, Inc.
Q1 2009 Earnings Call Transcript

Published: 30 Oct 2008

[Operator:]

Good day ladies and gentlemen, thank you for standing by. Welcome to the Super Micro Computer, Inc., first quarter and fiscal 2009 conference call. The Company’s new release issued earlier today is available from its website at www.supermicro.com. In addition, during today’s call, the Company will refer to it is by presentation that it has made available to participants, which can be accessed and 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 security 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 Wednesday, October 29th, 2008. A replay of the call of the call will be accessible until midnight, November 1st by dialing 188-8203-1112 and entering conference ID number 4598285, international callers should dial 171-945-7080. With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Pierre Hirsch, Senior Vice President, Investor Relations And now, I would like to turn the conference over to Mr. Hirsch. Please go ahead sir.

[Pierre Hirsch:]

Good afternoon and thank you for attending Super Micro’s conference call on financial results for the first quarter fiscal year 2008, which ended September 30, 2008. Before we begin, I would like to invite you of upcoming investor conferences where Super Micro will be presenting. The Company will be presenting a meeting with conductors and analysts at the [AEA] Classic Financial Conference on November 3rd and 4th in San Diego and at the UBS Global Technology and Services Conference on November 19th and 20th in New York. By now, you should have received a copy of today's news release that was distributed at the close of regular trading. A copy of which may be accessed on the Company's website at www.supermicro.com. 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. Please turn to slide two. Before we begin, please note that during the course of this conference call, management will be making forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Such forward-looking statements maybe late among other things to our expected financial and operating results, our ability to build and grow Super Micro, the benefits of our products and our ability to achieve our goals, plans, and objectives. Such forward-looking statements are subject to variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated. These include but not limited to current economic uncertainties, our dependence on continued growth in the market for [XA6 played] servers and embedded end application, increased competition, difficulties of predicting timing, introduction and customer acceptance of new products, poor product sales, difficulties in establishing and maintaining such relationships with our distributors and vendors, shortages or price fluctuations in our supply chain, our ability to protect our intellectual property rights, our ability to control the rate of expansion domestically and internationally, difficulty managing rapid growth and general, political, economic and market conditions and events. I will now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

[Charles Liang:]

Thank you, Pierre and good afternoon everyone. Now, let us turn to Micro. Super Micro, again had started a quarter of growth and financial performance. Super Micro’s revenue in the first quarter was $144.1 million or 22% higher than last year. Non-GAAP net income was $8.3 million or 27% higher than last year. Super Micro Non-GAAP earnings per share were $0.21 per diluted share compared to a $0.17 last year. In addition, Super Micro had record free cash flow from operation during this quarter. I would like to briefly discuss about market for several portals. Last [5.0], as we conclude, our first quarter of fiscal year 2009 on September 30, we saw the global financial crisis had begun to affect as a broad economy in our energy. Today, as we assess the market situations, we great [5.29] said as a result for our solid economic condition. Customers have shipped their requirements to application optimize and by the TCO, total cost of ownership server solutions. Clearly that will be more important than other to meet our customers’ expectation by delivering innovative and application-optimized solution dynamically. We have brief the cost strength of Super Micro work by [6.05] over our strategic development. We allow Super Micro to continue to be [6.11] market with application optimized solutions instead a market require. Therefore, we are confident that our mission and strategy will be successful in the future as it had in the past. Our mission is to continue to be the global leader in application optimized high performance server solution. Our strategy have to maintain our mark to market advantage, this still now have been involve solutions. Expand the portal of [6.41] utilizing the basic technology including Blade servers. Further improve our leadership in energy reasons, server solution designs and expand that into new market and industry. That is the [7.01] application optimized computing. Let me talk briefly about how Super Micro is differentiated and how we will use this our advantage. Please turn to slide six. Over the years, Super Micro we have invested in strong research and development in how is primary in the [7.25] headquarters. This center location contribute to our [7.31] market advantage, since we are near our technology catalogue and it is also allow hardware, maintaining, thermal, engineering teams and marketing corporation to work together harmonically and horizontally, which that, we had developed the largest array of server [7.56] to create optimized server solutions. This key differentiator enable Super Micro to be flexible and fast in creating solutions that satisfies the needs of our customers’ application at based of price performance ratio. We have confident that our strength will allow Super Micro to continue to have outstanding performance even in the current economic climate. We are well positioned to execute strategy and leadership, our technology leadership by extending our [8.39] scope and by offering the most competitive price to performance server solutions. In addition, our competitive advantage, we are also extended to our ability to offer a space [8.51] server architecture which [8.54] total costs of ownership. Now, let me talk about some of our main product innovation that will be released in the next and future quarters. Please go to slide seven. As you know, we have been developed in the [9.14] based on some order key new technology, which include the QPI base [9.24] processor and full way servers. We are going to release more than 20 different servers designed plus more [9.35] server storage platform. We favor key new features, AMB Shanghai processor-based platform and the new [9.49] based titanium platform QPI. Higher density server with QTR in recent technology. Back however when you twin innovation. But with the new Blade, we have support to EP node in one single frame. These were not just to increase the [10.14] but will also reduce the hardware cost for node and the system power consumption and then [10G] is in thet controller and switch product line especially the HPC optimized with the broke in 10G switch for both Blades level and [10.37] level. Super Micro ability to deploy those new technology and to extend our product offering will enable us to continue our technology leadership based on these strong product lines, I am confident that our business is well position for continues success. Now, I would like to turn it over to our CFO, Howard Hideshima who will discuss our financial results and outlook for the coming quarter. Howard, please.

[Howard Hideshima:]

Thank you Charles and good afternoon everyone. I will focus my remarks on earnings on both margins, operating expenses and similar items on a non GAAP basis which reflects adjustments that include stock compensation expenses. Reconciliation of GAAP to non GAAP is included in the financial statements of the Company in 10-K, earnings release and in the supplemental details in the slide presentation accompanying this conference call. Let me begin with the review of the first quarter's income statement. Please turn to slide 8. Revenue was $144.1 million, up 22% from the same quarter a year ago and down 3.4% sequentially. Slide 9

[Charles Liang:]

Thank you, Howard. Today’s market climate place well to Super Micro's strength and strategy. We are already witness the market achieved to an [19.23] on cost performance and the application of [amortization] where our competitors are unable to fulfill. Today, more than ever, [Cutmost] are considering Super Micro because they recognize that we can deliver specialized server solution they are optimized for their application while offering the best PCO for them. It is our strategy to view on this momentum, our broader customer awareness of Super Micro's capability. We will continue to expand our product line we support to market of technology that provides solution for our outmost dynamic need. In summary, I believe we are well positioned to outperform our competitors in today's market. I will now turn the call back to Pierre.

[Pierre Hirsch:]

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

[Operator:]

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (Operator's instruction) Your first question comes from the line of Jeff Fidacaro - Merrill Lynch

[Jeff Fidacaro:]

Charles, I am wondering if you can talk to us a little bit about the outlook and the IT spending characteristics that you have seen recently. If you look a few past downturns that you have gone through already, have you seen any different behavior in your end customer and what is different this time?

[Charles Liang:]

Yes, thank you for the question. Yes, we had seen some slowdown, a little bit slowdown in the market. Some customers are more price sensitive now and they are more picky for kind of lower power consumption for base TCO so we have something that is happening. However, we are happy to see that because we are very strong in application optimizer as you know. So we continue to satisfy most of the customer in data center and in other application. So although the market may continue to keep soft for a while, with our strong product line, we are quite confident.

[Jeff Fidacaro:]

If I could ask just one quick follow up. If you look at the guidance for the 2% to 10% type revenue growth next quarter, can you talk a little bit about what new products that include?

[Charles Liang:]

As you know, traditionally Intel introduced big product line in summer like in 2002, 2004, 2006; they all introduced new product line in summer of timeframe. However, this time [22.56] our QPR Technology, they shifted announcement and the production for spring '09. So this is one of the factors that with our December quarter may not grow that much as before. However, the growth worksheet to couple of few quarters later, the growth, the advantage is still there. Again, whenever we enter a new technology, really we have a much better growth in the following couple of quarters.

[Jeff Fidacaro:]

And any update in the Itanium?

[Charles Liang:]

Itanium, again its main production also maybe next summer so its long effect to our kind of financial performance for this year. By next year definitely.

[Operator:]

Your next question comes from the line of Alex Kurtz - Merriman, Curhan Ford & Co.

[Alex Kurtz:]

So, just a follow up on that QPI question, I was a little bit in the impression that that was really going to help you guys and maybe in the margins June quarter, can you just repeat again, Charles, what you were saying about maybe a push out in QPI regarding your internal forecast?

[Charles Liang:]

Yes, I mean and that is why that is mentioned this time into basically were introduced officially introduced and I mean supreme quarter and I push in early three where are the basis spring. That means that help to us where it really help in some in March but most in June quarter and then that will be at September quarter of 2009.

[Alex Kurtz:]

Okay and Howard, could you just and this is my follow up here, could you just talk about the gross margin a little bit? What was the inventory reserve and was there a specific product mix that helps grow the gross margin sequentially? Thank you.

[Howard Hideshima:]

Yes, the effect of the provision, Alex to answer your question this quarter get about 0.4% of the gross margins was affected by our progress that negatively affected and that is similar to what we have last quarter which is 0.1%. So, if you will see that, I think we have about 0.3% actually decrease negative effect on our gross margins from our reserve.

[Alex Kurtz:]

Right and then what about just the overall growth in margin? What helped it this quarter? I mean it was only up I guess 20 basis points but…

[Howard Hideshima:]

Right so in fact and again we continue to sell our products like UIO and 1U Twin very well. So, those are obviously helping us with our margins…

[Alex Kurtz:]

Where is the way to go?

[Howard Hideshima:]

And Blades servers are going too.

[Alex Kurtz:]

And the SuperBlade, has it increased to like the 5% of sales yet?

[Howard Hideshima:]

Not yet, it is still growing.

[Operator:]

Your next question comes from the line of Glenn Hanus - Needham and Company.

[Glenn Hanus:]

Following up on the financial questions, you got your non-GAAP operating margin up over 9% and sequentially really took down operating expenses I guess about $1.5 million pretty substantially. Could you talk a little bit more about how you curtailed that operating expenses so much and your operating expense outlook going forward?

[Howard Hideshima:]

Yes, I think Glenn last quarter, we were doing the finalization of our stock work and we passed off the last quarter at the end of our fiscal year and that resulted in a number of the consulting expenses to be occurred in the fourth quarter which did not follow on into this quarter. So, that was a primary portion of that reduction.

[Charles Liang:]

The other effect is because we spent a lot of manpower in developing Blade serve and about six months ago, pretty much we already finished most of the applicable design. So, now we are able to use those engineering resource to take care some OEM account and for those OEM account, we have designed charge income.

[Glenn Hanus:]

So, should we look at the operating expense base that you have today or you just reported as kind of the base level, is that we should think of going forward plus just very modest growth?

[Howard Hideshima:]

We see some growth going forward, Glenn.

[Glenn Hanus:]

But fairly modest?

[Howard Hideshima:]

Yes, I mean I think you have seen the Q4 that had about a good portion of stock expenses were taken so I do not think you will see that which you will see again some addition headcounts that we took in this quarter and again some minor expenses going up until the next quarter.

[Glenn Hanus:]

Could you talk about your headcount, where your headcount is at and what your plans are for headcount additions over the next couple of quarters?

[Charles Liang:]

Yes, indeed we are technology leader so it depends on economic condition. If market is still keeping soft then our headcount increase maybe more limited, maybe 5%, 10% gross for next three quarter but once the economy had come back and become much better, I guess we will hire additional headcount to our operation. It depends on our market condition.

[Howard Hideshima:]

Just some, specifically we grew about 24 heads during the quarter over quarter. We are about at 824 heads at the end of this past quarter and you will see as, again, as we talk back couple of quarters ago, we wrapped up our R&D and build the infrastructure to help us with all the new product launches. If you look over the last couple of quarters, you will see that that has kind of flattened up and so our expenses have flattened up.

[Operator:]

Your next question comes from the line of John Roth - Argent Capital Management LLC.

[John Roth:]

I am sorry, could you just repeat to me again what reflect the, you said regarding the adjustments really in [29.33]?

[Howard Hideshima:]

Sure, John. The reserve for inventory this quarter was 24% of sales.

[John Roth:]

Twenty-four percent.

[Howard Hideshima:]

Right, that is compared to about 0.1% in the prior quarter.

[John Roth:]

So probably if we expect the $100,000 net, instead it compare to 0.1% in the prior quarter but in the prior quarter, did you have as well a positive impact on the sale of the inventory that is usually reserved?

[Howard Hideshima:]

Yes, we did and so, we had here reserve and then we sell off some of that previously reserved item. The net effect last quarter was 0.1% of additional reserve or about $183,000.

[John Roth:]

Okay. So, okay that was nice catch. Again, on the tax rate, I think what I heard you say with what you expected for Q2 tax rate kind of referred back to that 32% level, is that correct?

[Howard Hideshima:]

That is correct. With the passage of the actually R&D credit was reinstated, so we have a bit of a catch up during this quarter and so our tax rate if you look back historically when the tax have happened back in fiscal year '07, we had about a 31.7% or 30.7% tax rate non GAAP in that period. So, we expect something similar this quarter.

[John Roth:]

Okay and then presumably looking forward and beyond, I know you are not going to provide guidance about a certain quarter the magnitude but what you would be adding in Q2 should be a reasonable possibility.

[Howard Hideshima:]

Well there is some catch up involved in the quarter because again you do not work R&D credit in prior quarters until the tax R&D credit was reinstated so the Q2 will be a catch up quarter and then if you look back historically, you will see that things level off after that.

[John Roth:]

Last question, had you been working to give any additional prospect that the share repurchase given with respect to the balance sheet cash flow you generate?

[Howard Hideshima:]

Sorry, John, cay you speak up just a little bit?

[John Roth:]

Yes, I am sorry. Has the Board given any sort of additional thought to potential share repurchase given the respect to your balance sheet and the amount of cash that you are generating?

[Howard Hideshima:]

John we have always started to take a look at back and what we have discussed as we do it and we have not planned anything at this point.

[John Roth:]

Okay, would you certainly aware where you are trading now and considering the back that seems to be better and better than a lot of folks that actually growing the business to improve the [32.32] pretty ugly downturn here. When I think to stock, I think it is a level where it is really pretty much of a lay up that guys could get out there and maybe we can share no doubt 12 to 18 months that heavily increasing in share and maybe to some capital but certainly not obligating some interested and [bullish anything stock] that will [33.03] in terms of share about the quarter.

[Howard Hideshima:]

We appreciate your comments, John.

[Operator:]

Your next question comes from the line of Manoj Nadkarni - ChipInvestor Group LLC.

[Manoj Nadkarni:]

You had a nice cash flow from operations in the September quarter. What are your expectations for free cash flow in the current quarter or at current revenue levels, what do you see as cash flow from operations?

[Charles Liang:]

You can see that we had been [33.40] confident in the last 15 years, no exception. So, next quarter basically is still quite positive. Howard, do you have more detail?

[Howard Hideshima:]

Yes, I think dealing in the factor again if we take a look back over the number of years, you will find that we have positive free cash flow look in every quarter and the only impact with that would be the acquisition of building at time to time. So, again if you look back over the last couple of years, you will see that we have had positive free cash flow.

[Manoj Nadkarni:]

Okay but it would vary from quarter to quarter you mentioned.

[Howard Hideshima:]

It can vary some but again, it is based upon our guidance right now with the 140 to 150 in revenues and $0.18 to $0.22 per share EPS again. So, that will produce result.

[Manoj Nadkarni:]

Okay and I have follow up question. Can you guys give some color on what you saw in the September quarter? What segment target for our geography wide you saw growth and were there any soft spots?

[Howard Hideshima:]

Yes, I think again with the broadness of the effects of this space, we have a very diverse product line but even this we saw not one sector being impacted more than other. I think we saw kind of fairly broad effects from this but again some of our diverse customer base having no customers over 10% of our revenues and some geographical diversity helps us in those situations but again it was fairly widespread. I cannot pinpoint in one sector versus another sector that is not particularly hard.

[Manoj Nadkarni:]

Okay, thank you.

[Charles Liang:]

Indeed, in last many years including last quarter, we continue to expand our product line. So, at the same direction we will continue for the next many quarter, next many years especially in the embedded area.

[Operator:]

You have a follow up question from Alex Kurtz - Merriman, Curhan Ford & Co.

[Alex Kurtz:]

Yes, guys I just have some data points that I wanted to ask you here. Howard, the OEM contribution, the one that was I think around 20, I think you have given up a 44% number last quarter. What was that percentage in this quarter?

[Howard Hideshima:]

Yes, so let us just go back in that, the OEM, the retailers maybe if you get that, I get on the conference call at 62.6% so that makes this quarter 37.4%.

[Alex Kurtz:]

For OEM end customer?

[Howard Hideshima:]

OEM end customer, that is correct.

[Alex Kurtz:]

Okay great and it looks like the internet vertical was down this quarter from it was, both on a percentage and then absolute basis. Was the weakness in the quarter seem for maybe push out at one of these larger data centers?

[Howard Hideshima:]

I think when we compete in data centers again we talk about it being fairly project related. The last quarter, we were up to about 15% and it was based upon some projects that we had won this quarter. Those projects were not there. We compete on features and technology so as the projects come out from the internet data center market, we have the best technology there to find a means on those projects arise and to this particular quarter, that project that we got last quarter did not arrive.

[Alex Kurtz:]

Okay so projects are in a quarter-to-quarter and so you do not have in a multiple quarter contracts it sounds like.

[Howard Hideshima:]

Yes, they are project by project basis.

[Alex Kurtz:]

Okay just again on the cash flow question, obviously some of your best cash flow growth in company history, what do you expect to see maybe next quarter and I am sorry if that question is already asked.

[Howard Hideshima:]

I think if you take a look in our guidance again, we have 140 to 150 EPS of $0.18 to $0.22, I think you will see that very similar to this quarter.

[Alex Kurtz:]

Great so just looking at working capital gains, you had in the quarter, do you think you will be able to maintain that level.

[Howard Hideshima:]

I think there is nothing that we have indicated that fairly different.

[Operator:]

You have a follow up question from John Roth - Argent Capital Management LLC.

[John Roth:]

Yes, sorry guys, just one quick follow up. What was the percentage of revenue in terms of the data center business this quarter?

[Howard Hideshima:]

Looking at data center, it was 7.5%, John.

[Operator:]

You have a follow up question from Glenn Hanus - Needham and Company.

[Glenn Hanus:]

Could you talk about, you said in your commentary on the improvement in gross margin beneficial pricing offset by higher freight so could you talk about are you referring to some component pricing that was better, just talk about the gross margin and sustainability of gross margins in the current level.

[Howard Hideshima:]

Yes, Glenn. I think as we talk about, we for example memory for our disk drive and those type, we started building partnership about a year and half ago and those partnerships increased and we have got any closer to those centers that we have thrown our volume in our business. So, again some of the positive benefits from growing that relation is the reduction of our overall cost.

[Charles Liang:]

And plus our overall revenue is consistently growing. So, those kinds of economic scale also consistent happiness.

[Glenn Hanus:]

But offsetting that, how is the pricing to your customers where in the competitive landscape, was pricing more difficult or more challenging out there or obviously your gross margins came in fine so was there some offsetting pressures that you saw this quarter that were not there in the past or how did that look look?

[Charles Liang:]

In pertinent area, you are pretty right. I mean last quarter we saw a relative more companies give in that into the customers. However we have most customers in every application especially in embedded and kind of high performance computing. Our overall margin is kind of quite stable. That had been quite stable.

[Glenn Hanus:]

Okay, so a little tougher in the data centers but the rest of the business pretty much unchanged.

[Charles Liang:]

Yes because we continue to outgrow our product cost especially in the embedded area and because that was out in both solutions, it is much easier for us to cover wider industry compare with other competitors.

[Glenn Hanus:]

Okay, could you reinforce a little bit why in a slower economy application optimized is more relevant and you should be somewhat insulated from the macro environment?

[Charles Liang:]

As we mentioned a couple of times ago when economy is tough, everyone, every end user watching deposit more picky, more carefully and when that happen, they are certain for at the phase of certain amount instead of continuing to do business with their order partner. So because we are new Company relatively compared with our competitors, customers become more picky, more aggressive, looking what basically is solution based to the [PCO], we got a better change especially in high efficiency computingperformance for work and performance for dollars. We are, I would like to say basically in the market today.

[Glenn Hanus:]

And you said in your slide there addressing new markets and industries that need optimize, so what are the new markets and new industries that need optimized that you are looking at going forward?

[Charles Liang:]

Okay, a couple of area for example, even in [gaming]. Gaming industry before we were not there but now, we found them more and more picky even gaming customers. So, there one not just performance friendship chart but also supplying the kind of high efficiency computing. In [42.38] for example, we found the people now is really picky for power consumption. Lots of time, even 1% or 2% based on power consumption and make cheap and efficient today. We do not see this long time ago.

[Operator:]

You have a follow up question from Manoj Nadkarni - ChipInvestor Group LLC.

[Manoj Nadkarni:]

Hi, you spoke about timeline for revenues coming from system based on new Intel processors. Can you tell us briefly what is happening with the systems based on new AMD processors?

[Charles Liang:]

Yes, in AMD we have a Shanghai product line of video enhance next month and we here have at least ten people shippable and about 20 people of service cue based on AMD process. We have impede already for Shanghai processes. So, we are kind of completing already for Shanghai process.

[Manoj Nadkarni:]

Okay, revenue ramp on four systems based on that platform. Is that dissimilar or it is just like one quarter or two capital quarter GAAP and then ramp up?

[Charles Liang:]

This time, we are going fab earlier because this time Shanghai basically almost in fact all comparable with their Barcelona CPU, not 100% but almost 100% effect are all comparable. So, we got to find tune BOM and find tune some system configuration. So, this convey that it is much easier and much quick.

[Operator:]

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

[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:]

That does conclude today's program. We thank you for attending and have a great day.