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Executives

Perry Hayes – SVP, IR

Charles Liang – Founder, President, Chairman and CEO

Howard Hideshima – CFO

Analysts

Alex Kurtz – Merriman & Company

Michael Bertz – Kennedy Capital

Glenn Hanus – Needham & Company

Dinesh Moorjani – Gleacher & Company

John Lopez – Saratog Capital

Super Micro Computer, Inc. (SMCI) F4Q10 (Qtr End 06/30/2010) Earnings Conference Call August 3, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Super Micro Computer Incorporated fourth quarter and full fiscal 2010 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 security analyst 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. (Operator Instructions) As a reminder, this call is being recorded Tuesday, August 3, 2010.

A replay of the call will be accessible until midnight, August 17 by dialing 1-877-870-5176 and entering conference ID number, 5174377. 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 on financial results for the fourth quarter and full fiscal year 2010 which ended June 30, 2010. Before we begin I’d like to advice you of upcoming investor conferences in which Super Micro will be participating. On September 16, we will attend ThinkEquity’s Annual Growth Conference in New York where we will present and participate in one-on-one meetings.

By now, you should have received a copy of today’s news release that was distributed at the close of regular trading and is also 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 and Presentations tab. Please turn to slide two.

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 2009, and our other SEC filings. All of these 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 outlook. For an explanation of our non-GAAP financial measures, please refer to slide 3 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.

Now I’ll 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 4. First, let me provide you with the highlights of our fourth quarter. We are pleased that our fourth quarter revenue was $202 million or 6.5% higher quarter-over-quarter, and 63% higher year-over-year.

This result is another record high for Super Micro. Non-GAAP net income was $9.11 million or 1.6% higher quarter-over-quarter and 141% higher compared to last year. Super Micro’s non-GAAP earnings per share was $0.21 per diluted share compared to $0.21 last quarter or $0.10 last year.

Slide 5 please. Now I would like to share with your our achievements during the past fiscal year. Fiscal year 2010 was a remarkable year of growth for Super Micro. And this quarter represents our fifth straight quarter of increase in revenues and our first straight quarter of record high revenue. We have achieved this growth because we are hopeful that best of product line in our history that have been optimized to the new processor technologies that were launched during the past year.

In addition, we are benefit by customers who took advantage of our newer technologies to improve their return on investments by investing in Super Micro technology which offers the best of performance, best of performance per watt, performance per dollar, performance per square foot and the lowest total cost of ownership. We expect these trends to continue.

This past year we had continuously invested in the growth of Super Micro in terms of expansion of our operation most at the headquarter and overseas. We have begun further integration operations in our Netherlands facility and in Taiwan in support of our OEM and local customers. With that we have increased our server integration facility and capacity during 2010 by 50%. And we are planning to increase more this year when the demand increase.

In fiscal year 2010, Super Micro entered server industry in technology and architectural innovation. We continue to grow our strong product line. We launched our award winning TwinBlade, our resource optimized servers, our doubled-sided storage server up to 45 3.5 inch hard drive in 4U. Our cabling and air flow optimizer SuperRack, our new generation Twin servers, our new GPU servers and our storage prepaid product line.

In addition we continued to have it above these server for recent launch of (inaudible) Intel with Xeon processor as whereas full 8/12-core AMD Magny-Cours G34 processor.

In the last quarter one of the engineering focuses was on the high end 8-way system design. We had effectively expanded our server fitting board for scale up (ph) and high end server solutions. This fitting board (ph) which included basic amount of CPU and memory module of 5U optimized chassis and redundant efficiency 2200 watt power supplies can also be used for other similar large and multi flex (ph) systems as (inaudible).

The current 8-way system in development we’re capable of supporting 8 Nehalem-EX processors, two terabyte of memory and 11 PCI Express expansion slots. It’s ideal for higher better ability for (inaudible) or back end mission critical applications. Our innovative technology leadership together with our footstep to mark advantage again have us to win market share in fiscal year 2010. We continue to outpace our competitors by growing annual revenue by 43% last year over our 2009. We have won exciting new business with major OEMs HPC customers including university, national and international regulatory, datacenter and many high value added verticals.

Our customer base is consistently growing and we are winning both in domestic and international markets and in key verticals. Those were our strategic goal for Super Micro because it allows us to withstand to customer demand on a global scale achieving our revenue goal allow us to further improve our operational efficiency especially in Europe and Asia. Growth also allows Super Micro to gain economic scale for better components cost from vendor allowing us to become more close to competitive and others have higher profit margin.

Especially to vendor pricing and allocation, in 2010, our growth in revenue in board processing (ph) positioned us to become sourced for components to an increasing number of our channel customers. This represents an additional source of revenue that is lower margin in the (inaudible) by allow us to further penetrate these customers and over the more comprehensive service such as system integration, performance optimization and product quality warranty and service in the long run.

During last quarter we were able to meet customers demand but due to certain components shortage and allocation, our margins were impacted, however the vendor relationship and economic scale improvement were help us to improve our cost and cost of margin in the near and long-term future. This past year we continued to invest in our foundation in both R&D and operational facilities both at the home and at overseas.

During the past year, Super Micro increased the headcount by 20%, with half of the increase in R&D while most of our competitor kept in (inaudible). Super Micro is still young and quick growing company which means we have a different manpower requirement than older and bigger companies. Although in the headcount we had some impact on our profit margin performance. It is good, however very good strategy to have us continue our pace and trend of growth in the future.

Nevertheless while we grow our headcount, we are achieving higher grade of productivity per employee as evidenced by our revenue per employee increase of roughly 27% in the first quarter compared to first quarter a year ago. In 2010, we invest in our production capability overseas to better service our customer in their local market. In support of local OEMs and major customers, we started our server integration operation in our Netherlands facility. As our further (ph) with oversea production later in the year we start our Taiwan facility to support our growing Asian business. With that we had increased our companywide total server integration capacity during 2010 by roughly 50% and we are planning to increase more in the coming year when needs. (Inaudible) new operations is necessary for our future growth which will come from region of the beside US market.

We have been carefully managing the investments and in these new operations by monitoring the headcount and the balancing resource to meet revenue expectation. As these operations ramp to higher board capacity we would certainly see higher capacity utilization and close to other substance leading to a stronger margin performance.

In addition, the oversea expansion would benefit us for by lowering our supply chain cost and the providing us access to lower tax rate. Slide six and seven please. During our past four quarters Super Micro had an awful product line that continues to have the mostly innovative technology in server industry along with some new development. Our leading technology includes first, our update Twin server architecture across 1U and 2U platforms which continue our leadership momentum for new generation.

Our award winning TwinBlade featured in 20 DP nodes support in 7U enclosure with 40 gigabyte per second Infiniband or 10 Giga Ethernet connectivity as option. Our GPU Optimized product line in 1U and 4U platforms that provide extreme performance in calculation-intensive application. Also our new 1U and 2U enterprise optimizer rack mount product line optimizer for enterprise authorization base application featured in the (inaudible) the Intel and AMD the news processor and 10GE onboard.

Our ATOM server 9 featured in low power, low noise and small form factor optimizes for embedded and server appliance applications. Our innovative double-sided storage provides a higher density. Again 45 piece 7.5 inch hard drive in for you with the ability of high (inaudible) from outside. One of our new generation 4 way systems is based on Intel Boxboro-EX chipset and new Nehalem-EX MP CPUs which provides a much higher memory and I/O bandwidth than the previous generation.

Our 8-way system where we target as high end enterprise mission critical application with the need of huge memory capacity and a tremendous computing power. Super SBB Storage Bridge Bay, which use our Twin design concept that can incorporate or Bridge SATA and SAS and fiber channel storage solutions. Also our cabling and air flow optimized SuperRack is ideal for high density and complicated cabling rack mount configuration.

Our 10GE switch for (inaudible) are in the leading position for our industry where we enter the 10GE Ethernet era. Last our MicroCloud product line optimizer for power application in an extremely low power consumption combination. As we close fiscal 2010, we are very pleased to report that while we continue to invest n R&D in new products and our people and the new operation in Europe and Taiwan, we again continue our 17 year trend of increasing our post of results.

For more specific on our fourth quarter, let me turn it over to Howard.

Howard Hideshima

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

Let me begin with a review of the fourth quarter income statement. Please turn to slide eight. Revenue was a record $201.7 million, up 63.4% from the same quarter a year ago and up 6.5% sequentially. The revenue for the fiscal year was a record $721.4 million up 42.7% from the same 12 months periods a year ago. The increase in revenues from last year was fairly widespread among our customer base, which we believe was primarily due to recovery in the global economy. The sequential increase in revenues from last quarter was primarily due to increased sales of our subsystems and accessories such as server boards, memory and chassis.

Slide 9. Turning to product mix, the portion of revenues from server systems was 32.2% of total revenues, which was a decrease from 36.7% a year ago and 33.6% last quarter. ASPs for servers was about $1,400 per unit, which is the same as last year and down from $1,500 per unit last quarter. We shipped approximately 47,000 servers in the fourth quarter and 956,000 subsystems and accessories. We continue to maintain a diverse revenue base with none of our over 450 customers making up more than 10% of our net sales in the fourth quarter. Furthermore, 60.9% of our revenues came from the US and 61.6% from our distributors and resellers. Internet datacenter revenue was 6.9%, which was a decrease of 1.6% from the prior quarter.

Slide 10 and 11. Non-GAAP gross profit was $31.1million, up 50.7% from $20.6 million in the same quarter of last year, and up 5.8% from $29.4 million sequentially. On a percentage basis, gross margin was 15.4%, down from 16.7% a year ago, and comparable to the 15.5% sequentially. Price changes from Ablecom resulted in a positive one basis point change to gross profit in the quarter, with total purchases representing 14.7% of total cost of goods sold compared to 19%a year ago and 19.9% sequentially. The year-over-year decrease in gross margin resulted from an increase in sales associated with accessories due to increased sales to distributors, resellers and system integrators who previously bought their own accessories and are now approach to see more of the total solution from us in assembling themselves.

Sequentially gross margins were comparable to primary effect on gross margin in the quarter resulted from higher margin on our server solution as result of the transition to newer products, continued offset in part by reductions in the percentage of revenues coming from server solutions as well as inventory variances associated with the decrease in cost of some of the parts which we purchased as well as on a overall reduction in our inventory which occurred in the quarter, and tracing the inventory caused delays and delivery of products such as server solution. This is reflected in the lower percentage of server solution sales on a sequential basis.

Our standard margins did in fact go up for the quarter, which were offset by the factors mentioned above. Customers continue to come to us to get the leading application optimized server solutions.

Slide 12. Operating expenses were $18 million up from $15.2 million in the same quarter a year ago and an increase from $17.3 million sequentially. As a percentage of revenue, operating expenses was 8.9%, down from 12.3% year-over-year and down from 9.1% sequentially.

Operating expenses was higher on an absolute dollar basis year-over-year and sequentially. We saw year-over-year increases in absolute dollars primarily in R&D as we continue to invest in its headcount to drive our innovation and product portfolio. Sales and marketing also increased primarily due to the growth in headcount to support the growth in revenue and marketing of new products. Overall our productivity for the company increased. Revenue per head increased from about $600,000 per head to $760,000 per head for the year.

Sequentially, we saw an increase in operating expenses of about $700,000 primarily R&D expenses of about $600,000 related the salaries and benefits associated headcount increases. The company’s headcount increased by 53 sequentially in Q1 36,000 total employees compared to 74 we added in Q3.

Overall, we have maintained good control of our operating expenses, while at the same time maximizing our opportunities for investing in our future. While others chose to reduce their headcounts, we chose to increase ours by 20% last fiscal year to invest in our future and build strength. Had we chosen a similar path like our competitors we would have made more today but at the expense of our future. Operating profit was $13.1 million or 6.5% of revenue, up by $7.7 million or 141.6% from $5.4 million a year ago, and up $1 million or 8.2% from $12.1 million sequentially.

Net income was $9.1 million or 4.5% revenue up $5.3 million or 140.7% from $3.8 million a year ago and up $0.1 million or 1.6% from $8.9 million sequentially. Net income for the fiscal year was $33.1 million, up 55.5% from $21.3 million for the same 12 month period a year ago. Our non-GAAP fully diluted EPS was $0.21 per share, up $0.11 from $0.10 per share a year ago and the same as the $0.21 per share sequentially. The number of fully diluted shares used in the fourth quarter was 43,683,000. The increase in diluted shares was primarily due to the impact of options, which were previously under warrant and the effect of ours use previously granted.

Our non-GAAP fully diluted EPS was $0.78 per share or $0.24 – up $0.24 or 44.3% from $0.54 per share for the same 12 month period a year ago. The tax rate for the fourth quarter on a non-GAAP basis was 30.2% compared to 28% a year ago and 25.7% sequentially. We expect the effect of tax rate on the non-GAAP basis to be approximately 33% for the September quarter.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and short and long-term investments were $79.4 million, up $6.2 million from $73.2 million in the prior quarter and down $5.6 million from $85 million at the end of fiscal 2009. In the fourth quarter, free cash flow was a negative $13.4 million which reflected a purchase of buildings for $18.5 million in June, the net change in cash was a positive $5.9 million for the quarter.

Slide 14. Accounts receivables increased by $9.1 million to $73 million and DSOs was 31 days, an increase of 2 days from the prior quarter. Inventories decreased by $8.8 million to $135.6 million, with the days in inventories decreasing by 5 days to 75 days. The decrease in inventory was due impart to some delays in receiving parts at the end of the quarter which delayed some shipment of servers. Accounts payable decreased by $8.1 million to $95.4 million, and the days sales outstanding decreasing by 8 days to 54 days primarily due to increase in inventories mentioned above.

Our cash conversion cycle days were at 52 days, an increase of five days from 47 days in the prior quarter. Now, for a few comments on our outlook. As indicated previously, during the fourth quarter, we saw continued improvement in the economy and the ramping of sales from the latest technology introduction, we expect to see continued ramping of these products as well as the ramping of our facilities in Netherlands (ph) and Taiwan. Both these factors should improve our possibility, although September is seasonally a flat quarter for the industry therefore the company currently expects net sales for the quarter ending September 30, 2010 in a range of $200 million to $210 million.

Assuming this revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.21 to $0.25 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 any time.

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

Charles Liang

Thank you, Howard. While we are pleased that 2010 was a remarkable year of success in growth (inaudible) we now look forward to a strong fiscal 2011 with our established operation in Netherlands and Taiwan, we would take advantage of lower cost of supply chain and logistics cost to improve our margin. Also as these operation ramp to grow capacity we will improve our productivity and thus improve our profitability.

Overall past year we had also invest in product development for several key partners (ph) and in the coming year we expect to see a strong payoff from ramping business from those products. With our award winning TwinBlade now launched in fiscal 2011, we also expect to see a consistent growth in our Blade server. Also in 2011 we expect that our high end product line for enterprise and mission critical application customers. We are providing the revenue and net margin upside from new markets. Therefore as we begin fiscal year 2011 we are positioned to execute on our strategy to grow our revenue operation and scale and to improve our portability in the upcoming years.

Operator, at this time we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll go first to Alex Kurtz with Merriman & Company.

Alex Kurtz – Merriman & Company

Yes, thanks for taking the question. Howard, I think it would be helpful to sort of quantify the impact from the components business that you talked about, the past through business that lower margin. Can you give us a sense of percent of revenue quarter-over-quarter and how that trended from the last quarter to the June quarter?

Howard Hideshima

Sure Alex, with regards to our subsystem accessory business, you’ll see that, last quarter we were basically down a bit as I mentioned on the call, our revenues from server systems went to 32.2%, that would make then the accessories and subsystem business being the balance of that which would be about 67.8%.

Alex Kurtz – Merriman & Company

What I meant Howard was, last quarter there were some pass through business in memory and discs and that you guys called out to specifically, and it sounds like that business was, had increased as a percent of the mix. Inside the component mix, can you talk about that specifically the sort of the pass through business and how that trended quarter-over-quarter?

Howard Hideshima

Actually we talked the greatest increase as I noted in the call, I ordered them in kind of the impact. We saw our server boards business actually increase within the accessories business quarter-over-quarter more so than any other of the components there that made up that mix. So memory last quarter was – memory and hard disc drives for last quarter are more of that passthrough business we talked about this quarter we see a more demand for our server boards, still some memory there and chassis actually.

Alex Kurtz – Merriman & Company

So was it the, and this is flat follow-up question here, was it the lack of additional servers that you’re hoping to ship that really impact the gross margin at the end of the day?

Howard Hideshima

Yes I think that’s a fair question as Charles alluded to, we had some shortages that delayed our delivery of some products again that affected our mix with regards to server solutions we could have shipped at the end.

Alex Kurtz – Merriman & Company

Okay so there were some capacity in servers that you were looking to ship at the end of the quarter but you didn’t have the specific components to do it and I wish you had called those components out and then should make up the revenue you sold more the sub components.

Howard Hideshima

I’m not sure about making up the revenue but I do believe that we shipped less of the servers that we could have had we had more parts.

Alex Kurtz – Merriman & Company

And would you care to quantify how many additional servers you guys passed up on at this point?

Howard Hideshima

No I think the percentage is there, you see we’re down a point, 1.4% quarter-over-quarter as a percentage of our revenue for servers.

Alex Kurtz – Merriman & Company

Right.

Howard Hideshima

Right and so if you look at that last quarter we were down about 2.5% and you saw an impact to our March I think this quarter you saw our margins basically flat between quarters even though we did have a reduction in our server business, right.

Alex Kurtz – Merriman & Company

Okay, thank you.

Operator

And our next question comes from Michael Bertz with Kennedy Capital.

Michael Bertz – Kennedy Capital

Hi guys, I guess it kinds of fall into Alex’s chain of thought there and I am going to ask you to try and quantify there, because I mean I do, I get the same questions he does about just how this is balancing out, it looks to me like so if you argue 1.5% or so quarter-to-quarter down on points that’s about $2 million worth of server business, is that enough to make up the bulk of the difference in terms we got obviously yes sure flat essentially quarter-to-quarter in terms of gross margin, but we’ve talked – and you guys talked last quarter about that improving some and so is this the major contributor to that or are the server board does that business simply that much lower of margin that everything else?

Charles Liang

Indeed one of the key reason is what because the memory and hard drive most of it big shortage in June quarter and that’s why we had to rush supplier and that’s why we pay higher cost for memory and hard drive in June quarter and that I guess one of the major reason why our overall gross margin was not that good.

Michael Bertz – Kennedy Capital

Okay well Charles forgive me for going on just a little bit, hard drives didn’t seemed to be a problem, unless there were some specific or you can help us understand what’s specific in the memory I believe maybe a little bit shortage for specific parts for servers but hard drives guys didn’t see we’d have bigger deal, I mean can you – and I understand having the (inaudible) I’m just trying to get some sense if you can put some numbers around so what we’re talking about here, I think one of us is that something rude to understand about your story with the gross margins?

Charles Liang

Indeed at Super Micro we did some shortages with hard drive as well, both hard drive and memory last quarter. It looks like this quarter is improving but yet last quarter we need to pay a little higher cost than March quarter or even December quarter.

Michael Bertz – Kennedy Capital

Okay well just again just to sort of everyone’s attention to this issue, Howard let me ask you to financial guide to sort of put some numbers around that I mean, if you sort of rank the impact little bit but can you give us some dips of impact, something in terms of how much that might have been for those different components?

Howard Hideshima

Yes like for example, let’s try it this way. Last quarter we saw about 1.2% decrease in our margins. We had a similar type of decrease in our percentages of server solution. I’m talking back to Q2.

Michael Bertz – Kennedy Capital

Sure, all right.

Howard Hideshima

And we saw that about 1.2% decrease in our margins and this quarter one of the main factors I would target back in the Q3 was basically that the server percentage, percentage of our content of our business had decreased right. This quarter we saw a similar type of server decrease maybe not as much but you’ve seen our margins be flat, right. So again I mean to help quantify that, we did see increases in our standard gross margins but they were offset by some of the inventory constraints that Charles has mentioned here and the price variance that you see.

Michael Bertz – Kennedy Capital

Okay so…

Howard Hideshima

They fall about a 100 basis points like say two quarters ago based upon server mix changing, right.

Michael Bertz – Kennedy Capital

Okay.

Howard Hideshima

Before we basically saw a similar decrease in our server percentage of revenues but you didn’t see that 100 point decrease.

Michael Bertz – Kennedy Capital

All right, so are you in the year conduced about 100 change percent increase to standard margin then?

Howard Hideshima

It’s fair to say.

Michael Bertz – Kennedy Capital

Okay, I will get back in the queue, but I probably have a couple here for you?

Howard Hideshima

Okay.

Operator

(Operator Instructions) And we’ll go next to Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Okay, following up on the gross margin question. Can you give us the puts and takes on the margin if you look forward this quarter?

Charles Liang

This quarter indeed we see memory supply – at indeed much better than last quarter in terms of memory supply. So actually this quarter we won’t have a memory shortage problem anymore. Hard drives where we also get a partnership improved. So hard drive demand and supply should be much improves this quarter as well. As to other components should be greater improving.

Glenn Hanus – Needham & Company

Okay and do you think perhaps your servers – you’ve been a couple of quarters in a row of your complete server systems declining on a percentage basis, do you think we can start to see that trend go back in the direction that you’ve talked about as an overall strategic direction for the company?

Charles Liang

Yes, I do believe that server percentage went back to our recovery consistently.

Glenn Hanus – Needham & Company

And can you just talk about the underpinning factors that’s going to move it now consistently more in that direction?

Charles Liang

In June quarter we really suffered a lot for shortage, right. And that’s why we spend more April with vendor and looks that relatively been dramatically improved. Also order of our memory supply is improving.

Glenn Hanus – Needham & Company

Okay and how is pricing – competitive pricing versus the major guys been a factor here one way or the other this quarter and what you anticipate in the September quarter now?

Howard Hideshima

Yes, pricing Glenn is always been tough all the way around, I mean the competition is still out there. The same competitors are still out there, we’re all going after the same business. We’re still approaching it the same way.

Glenn Hanus – Needham & Company

Okay, maybe lastly with the Nehalem-EX is when should that really get going and do you see that as somewhat of a help for you in the margin?

Charles Liang

Since late of June, we started shipping Nehalem-Ex and this trend which continue, right. And those are AMD G34 (inaudible) processor well, the new G34 which was launched two months ago.

Glenn Hanus – Needham & Company

Okay, thank you.

Howard Hideshima

Thank you.

Operator

And we’ll go next to Dinesh Moorjani from Gleacher & Company.

Dinesh Moorjani – Gleacher & Company

Great, thank you. Just maybe moving away a little bit from the gross margin side. Could you talk about how your international ramp is going specifically, where you are in your new customer ramps and you’re looking to add another line to your facility in Europe. Also could you update us on your expansion in Taiwan and if you’re seeing any new opportunities in either geography now that you have a physical presence in these regions?

Charles Liang

Yes indeed, we just invested in Netherlands and Taiwan for a logistic and system integration. And however as you know in early quarters, right, I mean in the first few quarter the capacity won’t be fully occupied. That’s why the productivity was not a good year, however situation would be improving. Today we have say OEM and key system integrator in Europe and in Asia who demand our local production. So those two areas we are continue consistently improving I believe.

Dinesh Moorjani – Gleacher & Company

Okay, yes in terms of the large new OEM that you’re ramping, you’ve talked about the customer potentially getting to a 10% customer, if the rest of your business doesn’t grow. What kind of timeframe are you thinking in terms of hitting that milestone?

Charles Liang

Howard, could you answer that?

Howard Hideshima

Yes, as we said it’s been over, we’ve been looking at the second half of the year is when we are start ramping or again the ramp has been a little slower than we expected but I think the potential is there still for as Charles alluded to and by building those facilities overseas we have number of new other customers coming to us to help utilize and fill that. So it will get better for us as we get going.

Dinesh Moorjani – Gleacher & Company

Great, thanks.

Operator

And from Kennedy Capital we’ll take a follow-up question from Michael Bertz.

Michael Bertz – Kennedy Capital

Thanks guys, and I’m going to go back to the margin for a second. So Howard as you look at the standard margins to go up and maybe that sort of range is fair to think about, I’m guessing it’s not going to be consistent across the different parts of the revenue contribution. So can you give me a little bit flavor plus or minus into the go more into systems and less in components or how would you think about that?

Howard Hideshima

Yes, I think it’s better in the system side for us obviously, it could be better alluding to the fact that Charles, we do have our own capacity that’s still not being utilized so again in that area the margins from that part of the business is still burdened by some overheard that we’re not utilizing yet, okay, but the margins with the technology transition have improved in that area.

Michael Bertz – Kennedy Capital

Okay and that actually leads to something else so if I think about the server side and sort of where I would estimate margins are currently running versus maybe where they were running a year ago or even 18 months ago, would you characterize that as still being like you said burdened by additional capacity and you’re not quite absorbing so you’re sort of structurally but you’re running less than at historical years and could we see a return to that level?

Howard Hideshima

I think it’s fair to say that yes we started the facility investment overseas probably about nine months ago now and we’ve put the investments in, we’ve been ramping that up and quite frankly it’s not being utilized yet so do we expect to see higher utilization and therefore better productivity, better efficiency part of those facilities and obviously better margins.

Michael Bertz – Kennedy Capital

Okay, I mean it kind of comes back to the sort of the bigger picture question about this because you’ve not want to say a change in sort of the run rate level to where margins are more mid teens than where they had been in the high teens, I certainly understand gross profit dollars at the end of the day being very important as the business is growing but it looks like incrementally margins haven’t been on a positive trends here and I think we’re all asking these questions because we’re trying to understand how that’s going to change. So this will be one way in terms of better utilization of the stuff you’ve invested in overseas particularly for the systems business as that can come out back to a bigger percentage of revenue but we’re all trying to put the pieces together and let us and say okay we can see a path of getting towards maybe those higher teens margins. Can you help us with that a little bit?

Howard Hideshima

Sure I think one of the things that was a little different for this quarter again our inventories went down by about $8 million during the quarter and as you know that there are some inventory variances that come through during that period of time that I alluded to in the call. So again some of those things offset the positive margins from the standard side and brought it down back to basically flat.

Michael Bertz – Kennedy Capital

Okay well Howard, I guess that was time in June, I am talking about looking forward here just sort of the pass on what components let’s say for (inaudible) running mid 15 % but your target is to get the 18% where are each 100 bits going to come from, is there going to be 100 bits from facilities a 100 bits from standard margin improvement, 100 bits from greater mix contribution from the system side, I mean how do we get there this is what I am asking?

Charles Liang

We do have few factors that will improve our gross margin and this net profit. One is economical scale, right. We continue to grow our business sides and that to kinds of help us in term of price negotiation and product allocation with shortage and second is our investment in Netherlands and Taiwan and the new facilities there pretty much under capacity, right, capacity under usage. So that will continue to improve for sure and then headcount kind of increase. Not to remind that we increase our 20% headcount compared with our competitor that pretty much give threat (ph) so that kind of increase kind of big portion of our cost and looking forward we already have a very strong team here so in coming year, at least we pretty much won’t hire than high percentage of headcount again.

Michael Bertz – Kennedy Capital

Okay, thanks guys.

Operator

And we’ll take another follow-up question from Alex Kurtz with Merriman & Company.

Alex Kurtz – Merriman & Company

Thanks I’ll take a breather on gross margin and mix it up for a second Howard. What was Europe quarter-over-quarter for you guys?

Howard Hideshima

Europe, the revenues from Europe actually up on a percentage basis, they were 21.4% in Q3 and 21.7% in Q4.

Alex Kurtz – Merriman & Company

Okay, so from a geo perspective do you guys see any great variances across your major markets?

Howard Hideshima

No I think as we talk about when we were on the road earlier people would ask whether we were seeing a lot of effect from the Europe stuff and the countries that we’re operating in are not in the those Mediterranean areas as much, so we didn’t see as much effect as exhibited by these numbers.

Alex Kurtz – Merriman & Company

Okay and just to clarify back to gross margin, just to clarify on some Michael’s questions, if you think about the (inaudible) adoption that you saw in the quarter, were there any delays in inventory from Intel around their product to help push out more service in the quarter?

Charles Liang

From Intel product point of view we did not see any shortage for sure but memory, hard drive we see a improving and AMD G34 now for sure we (inaudible).

Alex Kurtz – Merriman & Company

So those were the major components. So I think Howard in the past what we’ve always talked about has been new processors lead to better margins right.

Howard Hideshima

Right.

Alex Kurtz – Merriman & Company

It would have been the storyline. So just as a follow-up, did you see the server margin – and I guess can you quantify again what the server margins sort of grew us sequentially. So can we understand that there were some improvements in that fundamental piece of your business?

Howard Hideshima

I think as I talk – mentioned it earlier there was about a 100 bits space improvement in our standard margins across the board.

Alex Kurtz – Merriman & Company

Okay.

Howard Hideshima

And so again those were offset by some of the inventory variances I talked about. Now I added inventory that went down for the quarter which is a little bit unusual for us in a growth type of ramp. So again expectations are that we will be growing our revenues, growing our revenues and growing our inventories to support that growth.

Alex Kurtz – Merriman & Company

And just the last question, I know that increasing your capacity in Europe has always been a big cornerstone for you guys when you talk to investors about structurally improving your long-term gross margin, I think even this upcoming fiscal year, I think there was an expectation that that was going to help, is that because of the transportation cost right, that you were going to see gains from.

Howard Hideshima

Yes.

Alex Kurtz – Merriman & Company

Where are we on that, is that sort of off the table at this point?

Howard Hideshima

Yes Alex as we mentioned we’re not as far along as we thought we would be in that process, I think it’s from basically working with our customers, getting to know that business and then growing that business, we have – as I said earlier we have high expectations for that business still going forward.

Alex Kurtz – Merriman & Company

So you do not expect to sort of reap those benefits then from the increased capacity in Europe?

Howard Hideshima

I do, it’s just going to ramping.

Alex Kurtz – Merriman & Company

Okay.

Howard Hideshima

It’s just behind with the schedule of the customer.

Alex Kurtz – Merriman & Company

Okay, all right. Thank you.

Operator

And we’ll go next to John Lopez (ph) with Saratog Capital (ph).

John Lopez – Saratog Capital

Hi thanks I was just curious on the guidance, you guys characterized the industry is being sort of flat sequentially I think is fair but just we don’t have long time serious you guys but you’ve been down once sequentially which is 2008. So and obviously last year there was nothing seasonal about your quarter. So I’m just curious what makes this quarter feel more seasonal can you just discuss why the seasonality is more of a factor for you now perhaps and it’s been in your recent past?

Charles Liang

I get there is combination of overall market, IT industry kind of trend in our own historical experience. So this September quarter looks like a shortage problem where we improve in new product we have (inaudible) ramp up however kind of from our history September yearly did not grow that much.

Howard Hideshima

Yes, it hasn’t grown as much and again Europe is off basically for the holidays again from the first month. So again that usually is indicative of how we’ve guided before and to just bring back on the guidance again we’re at 200 to 210 well that’s only down maybe a percent at a low end, we’re up 4% on the high end, so.

John Lopez – Saratog Capital

Okay, it’s very helpful. Thanks.

Operator

(Operator Instructions) And we’ll take a follow-up from Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Could you comment on your long, you’ve commented in the past of getting back to 30% revenue growth. How are you feeling about that target and what sort of timeframe should we think about for that?

Charles Liang

Last year we achieved 43%.

Howard Hideshima

Yes.

Charles Liang

Right? So last year.

Glenn Hanus – Needham & Company

Whether I mean that was an easy compare so.

Charles Liang

So I mean looking forward I hope that we can catch that (inaudible) 30% year range. But that’s about our goal we are looking for.

Howard Hideshima

Yes Glenn I think if you take the soft compare out for ‘09 even if you go back and sort out ‘09 and put ‘08 in there, we did $540 million, we’re still up plus 30 plus percent so we’ve got seven years of CAGR at 30 plus percent excluding ‘09.

Glenn Hanus – Needham & Company

How about on the operating expense side, could you help me out a little bit with the puts and takes there, the rep of the R&D was up quite a bit this quarter, should we think about that as coming down perhaps here in September and then in the sales and marketing actually it was down this quarter sequentially despite revenue being up and how should we think about that in September?

Charles Liang

Yes for R&D headcount, I just mentioned in last year we increased about 10% headcount in R&D. So we already increased a lot of people and the major reason we increased so much last year because we supported some key accounts. We in kind of enable a strong product line for them but that product line had been very strong so looking forward we won’t hire that high percentage of R&D headcount again. So we still hire some but it won’t be as aggressive as last year basically (ph).

Glenn Hanus – Needham & Company

Okay and then on the sales and marketing?

Charles Liang

Sales and marketing we were continue to grow kind of certain level (ph).

Glenn Hanus – Needham & Company

And why was it down this quarter sequentially?

Charles Liang

This quarter.

Howard Hideshima

Glenn, we were down a couple of 100,000 this quarter primarily because trade shows last quarter, Glenn.

Glenn Hanus – Needham & Company

Sure, okay. All right, thank you.

Operator

And this does conclude the question-and-answer session of our conference call. I would like to turn the conference back to Mr. Liang for any 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 fourth quarter fiscal year 2010 conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.

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Source: Super Micro Computer, Inc. F4Q10 (Qtr End 06/30/2010) Earnings Call Transcript
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