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Super Micro Computer, Inc. (NASDAQ:SMCI)

F3Q2014 Earnings Conference Call

April 22, 2014 5:00 PM ET

Executives

Perry Hayes – SVP, IR

Charles Liang – Founder, President, CEO and Chairman

Howard Hideshima – CFO

Analysts

Aaron Rakers – Stifel Nicolaus

Mark Kelleher – D.A. Davidson

Glenn Hanus – Needham & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Third Quarter Fiscal 2014 Conference Call. The company’s news release issued earlier today is available from its website at www.supermicro.com. During today’s call, the company will refer to a slide presentation that is made available to participants which may 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 today’s 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, April 22, 2014. A replay of the call will be accessible until midnight May 6th by dialing 877-870-5176 and entering conference ID 6828329. 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 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 and financial results for the third quarter fiscal year 2014 which ended March 31, 2014. By now, you should have received a copy of today’s news release that was distributed after 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 on the company’s website under the Events and Presentations tab. Please turn to slide two. Before we start, I’d 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 2013 and our other SEC filings. All of these documents are available for 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 result is contained in today’s press release and in the supplemental information attached in 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 come to slide four. First let me provide you with the highlights of our fiscal quarter. We are pleased that our third quarter revenue was 373.8 million. It’s 4.9% higher quarter-over-quarter and 34.4% higher year-over-year. Non-GAAP net income was 17.8 million or 11.8% higher quarter-over-quarter and 77.1% higher compared to last year. Super Micro’s non-GAAP earning per share was $0.37 per diluted share compared to $0.35 last quarter and $0.23 last year. Slide five please. Super Micro’s third quarter was the second straight quarter of record heights for revenue and earnings. We are especially pleased that we achieved this exceptional revenue growth during a seasonally weak quarter. We grew again in multiples for our industry expanded market share and continued to be believe that our industry’s system architecture and solution innovation as well as marketing. Geographically, the revenue in North America was 54.5%, Europe was 21.7% and Asia was 21% of total sales. Most of our revenue growth comes from North America last quarter and was the strongest region while Europe and Asia follow a seasonal trend.

As we said last quarter, our strong foundation in product innovation and global operations prepare Super Micro to speed up sales momentum in 2014. Our services contributed 50.1% of our total revenue. It is the first time ever in Super Micro’s history that more than 50% of our sales come from computer systems. Computer server revenue mostly come from our OEM and direct customers which account for 48.1% and 15.9% from client and Internet data center. More and more of our customer understand that computer system and solutions from Super Micro bring more long value to their business. The systems have been optimized for performance, power efficiency and reliability, with our approved components, unique dedication and strict [inaudible] procedures for higher product quality and quicker [inaudible]. Now let me bring you up to-date on other several business progress. First, average product shipment increased 32% quarter-over-quarter as it continue to rent, it is still in rent cycle and we expect that this technology transition will continue through 2014.

Second our Asia operation utilization rate is above 50% now is and is continuously growing. We hope to reach 100% capacity within 12 months, while we continuously speeding up our business growth in Asia. Moreover, we had just start to use our newly acquired computer parts in Silicon Valley a facility will provide immediate and additional operational resource to serve our faster growing domestic market. Slide six please. The results this quarter indicated that our products and services have continued to extend their leadership position. Let me provide you some more highlights on specific products and service. We have been providing some select customers with total solutions including hardware computer system, server management and applications software for few quarters. As a result, more customers now can depend on Super Micro to deliver end to end computer solutions higher bid about 20 [inaudible] for which applications and more. In addition, we just had recently launched service program to complement our total solutions. It will provide a full maintenance with four hour and our next business day on site service. Now a reputed growing service program is further strengthened with our [inaudible] and we have seen an excellent response from customer to this new business solutions by extending our business model to provide a total solution and service, many new doors of opportunity have opened for Super Micro and we expect them to drive a more direct business globally.

Slide seven please. On our hardware side our Twin family grew strongly last quarter with FatTwin leading the way with over 20% growth year-over-year. Now FatTwin platform available in 150 models and 140 combinations is the most of higher multipurpose server architecture on the market optimized for high volume datacenter decrement. We also saw strong growth in our other three important including our recently launched Twin Pro series. The Twin Pro is our only solution on the market today that over 3.0 and storage options boosting our performance edge over competition. The Twin family makes up the largest supporter in our solutions which was up 50% year-over-year. On other system solutions storage and GPU/Xeon Phi Optimized has grown consistently with 32% and 42% year-over-year growth respectively. As we have provided a variety of storage in HPC solutions to many customers, we are also getting a lot of interest on our recently launched high density low power MicroBlade architecture. This supports our 112 nodes Atom or 28 node in 6U Form Factor it features up to four, 2.5 gigabit per second SPn[ph] sort of networking with 10 gigabit per second version coming soon.

Now extremely power and closely efficient MicroBlade architecture with the highly dynamic SDN will play an important role in our revenue stream for our coming quarters. Looking ahead, we are consistently creating new and exciting products as we are one of the premier innovators in the market. With our new software products and service offerings we are getting much to provide optimized computer solutions to enterprise customers, product development and innovation of next generation server storage and networking products is well underway. We are also executing to launch a brand new system architecture that will further optimize system for to-date and cloud applications. Now is definitely an inspiring time for us and our customers as we stand at the age of technology. In summary, Super Micro had a second straight quarter of record revenue and earnings. As I have said before, our aggressive investment in global foundation and strong product development enables Super Micro to achieve much higher revenue, profitability and momentum in 2014. We are off to a great start for calendar 2014 and we are focused on reaching the 2 billion run rate target.

For most specifics on the third quarter, let me turn it over to Howe.

Howard Hideshima

Thank you, Charles and good afternoon everyone. I’ll focus my remarks on earnings, gross margin, operating expenses and similar items on a non-GAAP basis which reflect 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 a review of the third quarter income statement. Please turn to slide eight. Revenue was a record 373.8 million, up 34.4% from the same quarter year ago and up 4.9% sequentially. The increase in revenue from last year was primarily due to our increase in service solutions sales particularly in the Internet data center customer. We are also benefiting from the technology transition to Ivy Bridge as well as new offerings of FatTwin storage and GPU Xeon 5 based solutions. On a geographical basis, we had strong growth around the world with Asia leading the way. The sequential increase in revenues was primarily due to strength in the U.S. in particular in the Internet data center customers. Asia and Europe were down on a seasonal basis. The strength of our innovative and broad solutions and the ranking of the technology refresh cycle, outweigh for us, what is traditionally a seasonally weak quarter for the industry.

Slide nine, turning to product mix, the portion of revenue from server systems was 50.1% of total revenues which was up from 41.8% the same quarter year ago, and from 48.8% last quarter. ASP for servers was $2,600 per unit, which is up from $2,100 last year and down from $2,700 last quarter. We shipped approximately 72,000 servers in the third quarter and 1,116,000 subsystems and accessories. We continue to maintain a diverse revenue base with over 700 customers and none of these customers representing more than 10% of our quarterly revenue. Internet data center revenue was 15.9% which was an increase from 12.9% in the prior quarter and from 10.8% in the prior year. The increase was primarily in the U.S. as we benefit from the expansion of the cloud and those looking for optimized solutions. 54.5% of our revenues came from the U.S. and 51.9% from distributors and resellers.

Slide 10. Non-GAAP gross profit was 57.5 million, up 47% from 39.1 million in the same quarter last year, and up 3.9% from 55.3 million sequentially. On percentage basis, gross margin was 15.4% up, from 14.1% a year ago and down from 15.5% sequentially. Price changes from Ablecom resulted in no basis point change to gross profit in the quarter with total purchases representing approximately 14.4% of total cost of goods sold, compared to 18.7% a year ago and 18.1% sequentially. The year-over-year increase in gross margin resulted from stronger vendor relationships, increased utilization from the Taiwan facility also impart, by higher Internet data center sales. Sequentially gross margins were down due to seasonally quarter for the industry and higher Internet data center sales, also impart by higher utilization of our facilities more complete server solutions and increase purchasing power.

Slide 11 and 12. Operating expenses were 33.2 million up from 30.8 million from the same quarter year ago, and from 32.3 million sequentially. The percentage of revenues operating expenses was 8.9%, down from 11.1% year-over-year and from 9.1% sequentially. Operating expenses were higher on an absolute dollar basis year-over-year, primarily on R&D as we invest in personnel expenses to support development of our solutions. Sequentially operating expenses were higher due to trade show expenses associated with [inaudible] as well as higher personnel expenses due to additional R&D resources. The company’s headcount increased by 60 sequentially through 1,721 total employees. We continue to focus on leveraging investment has made in our infrastructure while still making strategic investments in our solutions portfolio. Operating profit was 24.3 million up 192.9% from 8.3 million a year ago and by 5.6% from 23 million sequentially. On percentage basis operating margin was 6.5% up from 3% a year ago and from 6.4% sequentially. Net income was 17.8 million or 4.8% of revenues, up 77.1% from 10 million a year ago and 11.8% from 15.9 million sequentially. Our non-GAAP fully diluted EPS was $0.37 per share, up from $0.23 per share a year ago and up from $0.35 per share sequentially. The number of fully diluted shares used in third quarter was 48,103,000 shares. The tax rate for the third quarter on a non-GAAP basis was 26.4% compared to negative 23.1% a year ago and 30.5% sequentially. The rate was lower than last quarter due to the release of tax liabilities in the current quarter. We expect the effective tax rate on a non-GAAP basis to be approximately 31% for the fourth quarter which is up from 24.7% in the same quarter last year. The increase, reflect the reinstatement of the R&D tax credit in June of 2013 and the release of tax liability last year.

Turning to the balance sheet on a sequential basis slide 13, cash and cash equivalence for short and long term investments were 104.4 million, up 11.8 million from 92.6 million in the prior quarter, and up 7.7 million from 96.7 million in the same quarter last year. In the third quarter, free cash flow was a negative 8.7 million, primarily due to increased accounts receivables to support the growth of revenue. Slide 14. Accounts receivable increased by 20.9 million to 118 million due to record revenues mentioned above. DSOs was 41 days, an increase of three days from 38 days in the prior quarter. Inventory increased by 4.2 million to 295.1 million to support the increased and forecasted of revenues for a seasonally strong fourth quarter. Days and inventories was the same at 83 days, Accounts payable was 205.2 million which was comparable to prior quarter. Days payable outstanding increased by one day to 58 days. Overall cash conversion cycle days was 66 days, an increase of two days and 64 days in the prior quarter.

Now for a few comments on our outlook. During this third quarter we grew at a seasonally weak quarter for the industry due to our optimized solutions and leveraging the foundation we have built over the past few years. As we enter the fourth quarter, which is seasonally the strong quarter for the industry, we continue to leverage a foundation that we have built to continue to drive our growth and profitability. Therefore, the company currently expects net sales for the quarter ending June 30, 2014 in a range of 370 million to 410 million. Assuming this revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.35 to $0.41 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 at/or any portion thereof at any time.

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

Charles Liang

Thank you, Howe. Again last quarter was another record high quarter of revenues and earnings for Super Micro and it is a strong start to calendar 2014. With our leadership in innovation and market [inaudible] global capability grows. I’m confident that calendar 2014 we have a significant year of revolution and growth for Super Micro. Operator, as at this time we are ready for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen our question-and-answer session will be conducted electronically. [Operator Instructions]. I will go first to Aaron Rakers with Stifel.

Aaron Rakers – Stifel Nicolaus

Yeah, thanks for taking the questions. Congratulations on another solid quarter. I guess the first question and I have a follow up is on the gross margin line. When I look at the 15.4% gross margin that you guys just reported, obviously you saw record high contribution from your total systems revenue which typically would help that gross margin lines. So I think could you guys give us some color on the various different puts and takes particularly the mix of Internet data center vertical? And how that impacts that weighted gross margin relative to the mix of the total system business increasing?

Charles Liang

Yeah thank you for the question. Yeah, indeed recently our operation in Asia is pretty ready and strong and that’s why we start to get into more aggressively in cloud and Internet data centers. So, basically we gain pretty much one in U.S. one new in Asia and another new in Europe. So those high scale data center and Internet business kind of good for our long term and short term is we kind of had to sacrifice our profit a little bit. But long term, we will get benefit from those economical scale.

Aaron Rakers – Stifel Nicolaus

I guess just kind of follow up on that then, is there any kind of help that you can give us with regards to the differential between the gross margin of that Internet data center vertical as that seems to be obviously a growth driver here as we continue to move forward relative to I guess you call it the traditional enterprise business the non-Internet data center vertical?

Charles Liang

Indeed we are also growing very strongly in traditional enterprise market as officially now site service is fully available and our management is also available. So we are also growing aggressively in enterprise customer and that’s why our overall profit margin won’t be too bad I mean.

Aaron Rakers – Stifel Nicolaus

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

Charles Liang

Thank you.

Operator

[Operator Instructions]. We’ll go next to Mark Kelleher with D.A. Davidson.

Mark Kelleher – D.A. Davidson

Thanks. Thanks for taking the question. Can you guys hear me?

Charles Liang

Yes, we can.

Operator

Yes.

Mark Kelleher – D.A. Davidson

Okay. Just wanted to follow up on that question I’m going to ask sort of the same question in a different way. In the past you set some gross margin expectation should we look at some of the gross margin sort of plateau in here as the increase in data center continues to take more as a percentage of revenue? What are the longer term gross margin expectations right now?

Charles Liang

I guess the most important we try to mix it up it continues to grow strongly and with that we are selectively have some activity account with relatively lower margin and Howe may be you could add something.

Howard Hideshima

Yeah. Mark this is Howard. Also again we’re still holding to our targets. We are driving towards that and quite frankly, like I said, we always said that it wouldn’t happen in a linear fashion per se. And you have to remember that this is a seasonally weak quarter and if you look back historically, you’ll find that there is always margin pressure during the March quarter if you go back a couple of years.

Mark Kelleher – D.A. Davidson

Okay. And as a follow up question how about an update on the Taiwan manufacturing? Where are we in utilization there and are you going to want to put another line there?

Howard Hideshima

We’re kind of pleased it’s still behind schedule we are pleased as Charles mentioned it’s over 50% of our utilization at this point. We’re looking to drive and keep on filling up that facility and utilize the benefits it’s providing to us.

Charles Liang

And we believe that within one year, our utilization in Taiwan facility should be almost 100% so that’s pretty positive side for us.

Mark Kelleher – D.A. Davidson

Okay great. Congratulations again on the quarter.

Charles Liang

Thank you.

Operator

[Operator Instructions]. We’ll go next to Glenn Hanus with Needham and Company.

Glenn Hanus – Needham & Company

Good afternoon. So, on the revenue you did roughly 40 million of revenue upside in the quarter. Can you give us a little more color where did that upside come from? Obviously North America was strong Internet Data center did you may be have it sounds like you have couple of new large customers little more color on that. And then on the guide, I mean certainly good guidance but seasonally you might have stronger sequential growth into the June quarter. So was there some revenue perhaps that went into March did deal or two or something and then is little less in June can you give us some color around that?

Charles Liang

Yeah basically, so you know June traditionally our strong quarter and if I believe we’re the singular right? So except again that is why we say we start to be more aggressive in the Internet data center. However, we are also growing strongly in our enterprise accounts. So overall our optimizing should be consistently improving.

Glenn Hanus – Needham & Company

All right. I’ll take it up offline. Thank you very much.

Charles Liang

Thank you.

Operator

And this does conclude the question-and-answer session of our conference call. I’d like to turn the conference back to Mr. Liang for closing remarks.

Charles Liang

Thank you for joining us today and we’re 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, that does concludes the Super Micro third quarter fiscal 2014 conference call. We do appreciate your participation. You may disconnect at this time.

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