Super Micro's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Jan.21.14 | About: Super Micro (SMCI)

Super Micro Computer, Inc. (NASDAQ:SMCI)

F2Q 2014 Results Earnings Call

January 21, 2014 5:00 PM ET

Executives

Charles Liang - Chairman and CEO

Howard Hideshima - Chief Financial Officer

Perry Hayes - Senior Vice President, IR

Analysts

Mark Kelleher - D.A. Davidson

Aaron Rakers - Stifel Nicolaus

Glenn Hanus - Needham

Operator

Please standby. Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Second Quarter Fiscal 2014 Conference Call. The company's news release issued earlier today is available from its website at www.supermicro.com.

In addition, during today's call, the company will refer to a slide presentation that it has made available to participants which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

During the company's presentation, all participants will be in a listen-only-mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question-and-answer session, but the entire call is open to all participants on a listen-only basis.

As a reminder, this call is being recorded, Tuesday, January 21, 2014. A replay of the call will be accessible until midnight February 4th by dialing 1 (877) 870-5176 and entering conference ID number 9732681. International callers should dial 1 (858) 384-5517.

With us today is Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President, Investor Relations.

And now I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Perry Hayes

Good afternoon. And thank you for attending Super Micro's conference call on financial results for the second fiscal year 2014 which ended December 31, 2013. 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.

Please turn to slide two. Before we start, I’ll remind you that our remarks include forward-looking statements. There are 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 2013 and our other SEC filings. All of those documents are available from the Investor Relations page of Super Micro’s website at www.supermicro.com. 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. Please turn to slide four. First, let me provide you with the highlights of the second fiscal quarter. We are pleased that our second quarter revenue was $356.4 million. It’s 15.3% higher quarter-over-quarter and 22.3% higher year-over-year.

Non-GAAP net income was $15.9 million or 60.9% higher quarter-over-quarter and 103% higher compared to last year. Super Micro’s non-GAAP earnings per share was $0.35 per diluted share, compared to $0.22 last quarter and $0.18 last year.

Slide five and six please. Super Micro’s second quarter was record high for revenue and earnings. We grew again in market products or industries gross rate. Our foundation in product innovation and global operation came together this quarter to produce these record results.

Here is a fiscal breakdown of last quarter’s revenue, our server system contribute 48.8% of our total revenue. 46.6% of our business last quarter came from OEM and Direct customers, with the Internet Data Center accounting for 12.9% of sales, which increased 55.4% from last quarter.

Our continued focus on offering completed systems and total solutions is again showing strong progress. More partners from both channel and Direct are moving toward taking completed system from Super Micro because of its higher product quality, greater time-to-market, optimized product performance and power efficiency and available global logistics support.

Geographically, revenue in North America was 50.4% and Europe was 23.9% of total sales. Notably, Asia jumped to 23% of our total revenue, contribution which was up from 17.8% last quarter and 20.7% last year.

As I have said before, Asia will become a large part of our revenue story, due to our readiness at Taiwan facility. We are able to scale and deliver high quality product for Asia and certain world-wide customer base.

Europe revenue also was up approximately 27% comparing to a year ago. North America our largest and most consistent market was up significantly in absolute dollars from last quarter, while Asia has shown most strength in term of total revenue of percentage.

In last quarter’s earnings, I mentioned several aspect of Super Micro’s effort to build a stronger foundation. Allow me to emphasize again the strength of our company including our product innovation and global production capacity. Super Micro is continuing to develop further products that have won the market praise because of their superior application optimization and pure performance, performance per watt, per dollars and per square foot.

For example, during the quarter, we launched the TwinPro Architecture that supports by interchanging First SAS 3.0 storage, NVMe, accelerated PCI-E SSD performance and Titanium Level efficiency power supply in the data center optimized package. Other than the TwinPro, we are also preparing to launch the brand new ultra high density extreme low power Microblade architecture on this March which will support 112 Atom Nodes or 28 dual processor DM nodes in the 6U form factor.

Now Microblade will feature integrated 2.5G or 10GE switch. Then we’ll enter to introduce the cable course and TCO for our customers and to extend our technology leadership that TwinPro and the MicroBlade are great beginning options to come in 2014.

We also saw a strong growth for many product lines on a year-to-year basis. Our FatTwin, the key products of 2013, grew 128% -- 129% year-over-year. Our storage solution demonstrate strong growth last quarter by 49% year-over-year and 24% quarter-over-quarter.

Our HPC Solutions including GPU and Xeon Phi grew 58% year-over-year and 35% sequentially. The Intel Ivy Bridge achievement and switch product are also ramping nicely and have been to create additional demand. All these products suggest that our application optimize solutions are in great demand by cloud service, data center, channel partner and large corporate accounts.

As we extend our offerings to a software suite that remotely managed data center and on site service for mission-critical application customers, who need long [accountable] our support. I’m confident that this product will become best resources of our stated revenue stream in 2014.

Parallel to our growth in product, our global operation foundation is getting much stronger as well. The growth in our Asia business this quarter can be shown sooner utilization of our Taiwan facility that had record high utilization and delivery volume. In addition, our rapid business growth has driven the need to utilize all available space we have at Taiwan and remote production capacity ‘09.

As soon as our Taiwan capacity reached 60% at our existing site, we will begin our next phase of our Asia expansion plan. I strongly believe this preparation will happen this year as we reach for our $2 billion revenue target.

In summary, Super Micro had a record quarter for revenue and earnings because of our investment we had met to ensure, we had room for our growth. We are in the strongest position than ever before. And we are realizing multiple times of industry growth rate as we’re faster approaching the $2 billion revenue growth.

Now, we are extremely focused on executing our strength in technology and leveraging our global foundation. We believe calendar 2014 will be a very strong year for Super Micro. For more specifics on our first quarter, let me turn it over to Howard.

Howard Hideshima

Thank you Charles and good afternoon everyone. I will focus my remarks on earnings, gross margins, operating expenses and similar items on the 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 in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with the review of the second quarter income statement. Please turn to Slide 11 -- 7. Revenue was a record $356.4 million, up 22.3% from the same quarter a year ago and 15.3% sequentially. The increase in revenue from last year was primarily due to our increase in server solution sales particularly in our innovative product such as Storage, FatTwin, GPU/Xeon Phi, Racks and Switches. This couple with our management software and support services has further opened opportunities in the market for us.

On geographical basis, we had strong growth around the world with Asia leading the way. A sequential increase in revenue was primarily due to seasonal strength in the industry and continued strength in our innovative product above. In addition, Ivy Bridge which was launched on September 10 continue to ramp nicely, benefited by a broad product line.

Turning to product mix, a portion of revenues from server systems was 48.8% of total revenues which was up from 43.3% for same quarter a year ago and from 46.4% last quarter. ASP for servers was $2700 per unit which is up from $2100 last year and up from $2600 last quarter.

We shipped approximately 63,000 servers in the second quarter and 1,173,000 subsystems and accessories. We continue to maintain a diverse revenue base with over 600 customers and none of these customers are representing more than 10% of our quarterly revenues.

Internet data center revenue was 12.9% which was an increase from 8.3% in the prior quarter and a decrease from 14.2% in the prior year. Furthermore 50.4% of our revenues came from the U.S. and 53.4% from our distributors and resellers.

Slide nine and 10. Non-GAAP gross profit was $55.3 million, up 37.2% from $40.3 million in the same quarter last year, and up 17.7% from $47 million, sequentially. On a percentage basis, gross margin was 15.5%, up from 13.8% a year ago and up from 15.2% sequentially.

Price changes from Ablecom resulted in no basis points change to gross profit in the quarter and total purchases representing approximately 18.1% of total cost of goods sold compared to 15.4% a year ago and 17.3% sequentially. The year-over-year increase in gross margin resulted from strong vendor relationships, lower provision for inventory reserves, given product transition last year and a favorable product mix.

Sequentially, gross margins were up due to higher utilizations of our facilities, favorable product mix and more complete server solutions and an increase purchasing power due in part to increasing the scale of our business.

Slide 11. Operating expenses were $32.3 million, up from $29.9 million in the same quarter a year ago and down from $32.1 million sequentially. As a percentage of revenues, operating expenses was 9.1% down from 10.2% year-over-year and down from 10.5% sequentially.

Operating expenses were higher on an absolute dollar basis year-over-year, primarily in R&D as we invested in personnel expenses to support the development of our products. Sequentially, operating expenses were lower due to less prototype material and testing fees with the rollout of our Ivy Bridge Based products in September.

The company headcount increased by 51 sequentially to 1,661 total employees. We continue to focus on leveraging the investments we have made in our infrastructure while still making strategic investments in our product portfolio.

Operating profit was $23 million, up by 118.6% from $10.5 million a year ago and by 57.1% from $14.6 million sequentially. On a percentage basis, operating margin was 6.4%, up from 3.6% a year ago and from 4.7% sequentially. The operating is at the lower end of our target model.

Net income was $15.9 million or 4.5% of revenues, up 103% from $7.8 million a year ago, and 60.9% from $9.9 million sequentially. Our non-GAAP fully diluted EPS was $0.35 per share, up from $0.18 per share a year ago and from 22% per share sequentially. The number of fully diluted shares used in the second quarter was 46,022,000.

The tax rate in the second quarter on a non-GAAP basis was 30.5% compared to 24.5% a year ago and 31.7% sequentially. The rate was lower than last quarter due to the release of tax liability.

We expect the effective tax rate on a non-GAAP basis to be approximately 31.8% for the third quarter, which is up from negative 23.1% in the same quarter last year. The increase reflects the reinstatement of the R&D tax credit in March of 2013 and the release of tax liability last year.

Turning to the balance sheet on a sequential basis, slide 12. Cash and cash equivalents and short and long-term investments were $92.6 million, down $21.6 million from $114.2 million in the prior quarter, and up $1.5 million from $91.1 million in the same quarter last year. In the second quarter, free cash flow was a negative $31.9 million, primarily due to purchases of 36-acres of property in San Jose, California for $30.2 million.

Slide 13, accounts receivable increased by $27.1 million to $161.2 million due to record revenues mentioned above. DSOs was 38 days, a decrease of four days from 42 days in the prior quarter. Inventories increased by $36.6 million to $290.9 million to support the looming year all day shutdown in Asia. Days and inventories decreased by 6 days to 83 days.

Account payable increased by $40.1 million to $205.8 million due to increased inventories mentioned above. Days payable outstanding increased by two days to 57 days. Overall, cash conversion cycle days was 64 days, a decrease of eight days from 72 days in the prior quarter.

Now for a few comments on our outlook, during the second quarter, we saw a sequential -- seasonally strong quarter in which we continued to grow at multiples of the industry determine by the foundation of investments we have made in the past in our technology and infrastructure.

As we enter the third quarter which is a seasonally weak quarter for the industry, we look to further take advantage of the foundation we have built to continue to drive our growth. Therefore, the company currently expects net sales for the quarter ending March 31, 2014 in a range of $320 million to $350 million.

Assuming this revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.24 to $0.30 for the quarter. It is currently expected that the outlook will not be updated until the release of the company’s next quarterly earnings announcement. Notwithstanding subsequent developments, however, the company may update the outlook or any portion thereof at anytime.

With that let me turn it back to Charles for some closing remarks.

Charles Liang

Thank you, Howard. Again, last quarter was a record quarter of revenue and earnings for Super Micro, providing that Super Micro is leading server, storage and competitive solution company and a strong competitor. We believe that we are well-positioned for a very strong calendar year 2014 and possibly reaching the $2 billion run rate very soon.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we will first go to Mark Kelleher from D.A. Davidson.

Mark Kelleher - D.A. Davidson

Great. Thanks for taking the questions. Congrats on a great quarter there, guys. Want to talk about Ivy Bridge contribution in the quarter. Can you quantify how strong that was in the quarter, can you quantify where we are in that product cycle and how that should rollout over the next couple quarters?

Charles Liang

Yeah. Ivy Bridge is still a pretty new product. Again, they are available for about one and half quarters and quarter-to-quarter, we grew about 70% for Ivy Bridge.

Mark Kelleher - D.A. Davidson

As far as -- yeah, of volumes.

Charles Liang

So kind of new products, so I believe we are continuing to grow.

Mark Kelleher - D.A. Davidson

Okay. And I will -- my follow-up question kind of unrelated, the competitive landscape, clearly you are growing faster than just about every other vendor out there. How do you think that landscape might change if IBM were to divest their x86 business as was no more today?

Charles Liang

Yeah. For sure, it’s an not an easier task and that’s why we have spend lots of efforts to build our foundation in terms of engineering capability, in terms of global operation cost and all of those investment were been heavily in the last three years, have been pretty ready. And that’s why we start to see the advantage to grow stronger than others.

Mark Kelleher - D.A. Davidson

Okay. Thanks.

Charles Liang

Thank you.

Operator

And we’ll now go to Aaron Rakers from Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Yeah. Thank you for taking the question and then also congratulations on the quarter. I would like to talk a little bit about gross margin. Some of the levers that you still see in front of you, I guess starting with where you stand today on the Taiwan facility in terms of utilization where we expect that to be trending out over the next couple of quarters and then on top of that just remind us again if what other levers you have to kind of attaining your target model?

Howard Hideshima

Yeah, Aaron, this is Howard. With regards to utilization on Taiwan, that was still about 41% for the December quarter and growing. Obviously it’s a record for us, previous record for us was about 36%. So that’s one of the levers we talked about with investors all the way along as far as increasing the utilization for not only the Taiwan facility but obviously our operations worldwide. So that’s one of the important levers for our gross margins.

We also hit a couple of other levers that we’ve talked about in the past. Product mix, as we drive towards more complete server solutions, it would be beneficial to our margins, growing our scale of business. Again that contributed during the quarter to improvement in margins and to a lesser extent we talked about software and support services. And I’m glad to see that they are starting to contribute a little, albeit little but just starting to contribute for us. So the levers that we’ve talked about in the past are -- it's quite gratifying to see some real numbers pulling behind.

Charles Liang

Yeah. They all factor in, but it is still about one-year old new product. They continue to grow strongly. And we just announced our TwinPro, which is another kind of performance per watt enhance Twin Architecture. And just ramping up now quickly and follow by our MicroBlade in next few months. So, I mean, new product, new architecture, outperform competition that [help us a lot].

Aaron Rakers - Stifel Nicolaus

Okay. And then as a follow up, I'd like to maybe understand a little bit better your Asia-Pac growth in particular was obviously notably impressive this quarter, especially in the context of what IBM just reported tonight. Can you talk about your exposure in Asia-Pac and in particular your positioning, how meaningful China is in your positioning specifically within China?

Charles Liang

Yeah. I mean, Asia is relatively a new market for us, right. We started to focus on Asia aggressively about two to three years ago and now we have getting stronger foundation there, especially a production ready in Taiwan. So, I mean, we continue gaining good customer in both, China, Japan and Korea. So that's very solid trend to go I believe.

Aaron Rakers - Stifel Nicolaus

And how big is China of Asia-Pac, can you help us understand that?

Howard Hideshima

It's still roughly a majority of the Asia-Pac area.

Aaron Rakers - Stifel Nicolaus

Okay. I'll get back in queue. Thank you.

Charles Liang

Thank you.

Operator

(Operator Instructions) We'll now go to Glenn Hanus from Needham.

Glenn Hanus - Needham

Good afternoon. Liang, your Data Center business was up strongly. Can you talk about what the trend -- what was behind the trend there this quarter and maybe what to expect over the next few quarters?

Charles Liang

Yeah. I guess, the major reason because our capacity in logistic global have been getting very strong. So we are much more ready to approach those huge Data Center now. So I believe we are continuing growing in that territory quickly.

Glenn Hanus - Needham

So with some of the Data Center wins over in Asia or can you characterize maybe geographically where the growth really came from this quarter and was it sort of highly concentrated in a couple of large deals?

Howard Hideshima

Yeah. Glenn, this is Howard. With regards to where it was -- we saw some nice deals in Asia, that grow some of the percentage is in Asia up during the quarter. We also saw some continued growth in the U.S. which was nice to see also.

Charles Liang

And Europe as well.

Howard Hideshima

And Europe as well.

Charles Liang

Pleasantly, yeah.

Glenn Hanus - Needham

And what's your outlook for the next few quarters there?

Charles Liang

I guess we'll continue evenly growing, although, Asia will be a little faster.

Glenn Hanus - Needham

Okay. Thank you.

Charles Liang

Thank you.

Operator

And it appears there are no further questions at time. So I will turn the conference back over to our presenters for any additional or closing remarks.

Charles Liang

Thank you for joining us today and we are looking 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. And that does conclude the Super Micro’s second quarter fiscal year 2014 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.

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Super Micro Computer, Inc. (SMCI): Q2 EPS of $0.35 beats by $0.09. Revenue of $356.4M (+22.3% Y/Y) beats by $22.9M. Shares +7.1%.