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Executives

Perry Hayes – SVP, IR

Charles Liang – Founder, President, CEO and Chairman

Howard Hideshima – CFO

Analysts

Noah Huth – ThinkEquity

Aaron Rakers – Stifel Nicolaus

Alex Kurtz – Merriman & Company

Glenn Hanus – Needham & Company

Nehal Chokshi – Technology Insights Research

Super Micro Computer, Inc. (SMCI) F4Q2010 Earnings Call Transcript January 25, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Super Micro Computer Incorporated second quarter fiscal 2011 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 has been made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events & Presentations tab.

During the company’s presentation, all participants will be in a listen only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question-and-answer session, but the entire call is open to all participants on a listen-only basis. As a reminder, this call is being recorded Tuesday, January 25, 2011. A replay of the call will be accessible until midnight, February 8 by dialing 877-870-5176 and entering conference ID number 2548129. International callers should dial 1-858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President, Investor Relations. And now I’d like to turn the conference over to Mr. Hayes. Please go ahead, sir.

Perry Hayes

Good afternoon, and thank you for attending Super Micro’s conference call and financial results for the second quarter fiscal year 2011, which ended December 31, 2010. Before we begin, I’d like to advise you of upcoming investor conferences in which Super Micro will be participating. On February 9, we will attend the Stifel Nicolaus Technology Conference in San Francisco 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 available on the company’s website. As a reminder, during today’s call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company’s website under the Events & Presentations tab.

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 2010, and our other SEC filings. All of those documents are also 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 our second quarter. We are pleased that our second quarter revenue was record high, $241 million or 16.2% higher quarter-over-quarter and 32.3% higher year-over-year. Non-GAAP net income was also a record high of $13.3 million or 43.9% higher quarter-over-quarter and 44.4% higher compared to last year. Super Micro’s non-GAAP earnings per share was $0.31 per diluted share compared to $0.22 last quarter and $0.22 last year.

Slide five, please. Now I would like to share with you some key points regarding our operating performance in the second quarter. The second quarter of fiscal year 2011 represents our fifth straight quarter of record high revenues. As a fast-growing company, we have been focusing on increasing revenue and gaining much share.

As a result, we are achieving a better economy of scale and brand name recognition. After economic (inaudible) for almost two years now, we have been consistently growing faster than our competitors and our general market. With $241 million in sales this quarter, our growing rate will then surpass $1 billion, making another milestone for Super Micro.

For the past several quarters, we have been building the foundation of our growth by adding our engineering and production capacities. Geographically, we have expanded our capacity for logistics and system integration in Europe and Asia. So we are able to fully improve our time to market advantage and no other shipping and other cost for our customers in those regions.

Our results of this quarter indicated that our plan for strengthening our foundation are paying off. Indeed, we are doing so by including our Taiwan R&D to some integrations and operations capacity. In fact, Super Micro grew in all regions last quarter, much faster than our competition, especially we have been experiencing strong growth in APAC and Europe.

Another aspect of building our foundation is through our branding. The Supermicro Brand had gained great reputation from our consistent focus on providing application optimized solutions based on the latest technology and in green. Super Micro’s unique approach offer customers the greatest choice and expertise in optimizing the solution that comes the closest to meeting their requirements.

Super Micro’s optimized solutions and time-to-market leadership yield better ROIs for customers because of efficiency in performance, power consumption, and feed curve [ph] space. These are the reasons that the Supermicro Brand is recognized by customers in many different segments, like server appliance, enterprise computing, Internet, datacenters, cloud computing, and HPC solutions such as oil and gas, financial, medical, math, science, and so on.

During last quarter, we saw evidence of this growing brand awareness with strong growth in our high-end server product lines. We sold a record number of server solutions, including complete integrated server. Our OEM and direct customers see the value and quality of Super Micro integration and testing. Thus our systems sale increased to over 40% of our total revenue. By selling more complete solutions, we are increasing our revenue and net profit.

Super Micro’s great product line continues to grow, and our growth trend had begun accelerating in the past several quarters. However, our winning brand product had especially achieved strong brand recognition. Indeed, last quarter our SuperBlade revenue was more than doubled over the previous quarter, which is next blade, our faster growing product line.

Recently, at a supercomputing show, SC10, we announced our new GPU Blade to join our SuperBlade product line. This new introduction we have fully strengthened. Now we operate by also our GPU computing product offerings. Our GPU solutions have also been very strong this quarter. GPU had been one of our fastest growing product lines in the last 18 months, and Super Micro continues to lead the market for GPU solutions.

Most recently, our GPU installation at the University of Frankfurt, Germany, had been granted the 22nd fast-paced computer on Top-500 and also achieved a ranking of number eight as the most power efficient supercomputer on Green500. The GPU computing market is one of the strongest growth markets in the x86 market, and Super Micro evidently is in the leading position.

While focused on our revenue growth and gaining market shares, we have also improved our profitability for the third straight quarter. We had demonstrated that we can grow both top-line and bottom line to remain on focus on this balanced growth. However, we will provide more financial commentary data.

Looking ahead to upcoming technology trend, we are excited about our upcoming Intel (inaudible) solutions. This is a very significant design change from Intel. Now we are offering much better performance (inaudible) solutions. The UP Sandy Bridge solution will be launched in February and that DT-Sandy Bridge solutions will be launched (inaudible).

Super Micro had been busy developing our new next generation server boards and chassis designs for optimizing the new processor technology. It is our goal to utilize our building block approach to develop the latest array – our largest array of server products that will be available at the time of launch. This will provide us a great deal of advantage of gaining market share.

Let me now share with you something about how our product line (inaudible) for our upcoming quarter. Slide six and seven, please. Along with some new developments, our leading technology include, first, our new extensive skews of Twin architecture for 1U and 2U platform continues our leadership momentum. The 2U Twin cubes will set another highlight in computation tests.

Our award-winning TwinBlade is in high volume fashion, featuring 20 DP nodes in the 7U per enclosure, with dual 40 gigabit per second Infiniband or 10G Ethernet connectivity as options. Our GPU optimized product line in 1U, 2U, 4U and blade platforms provide extreme performance in calculation-intensive applications and had been the most popular GPU servers in the market. Our embedded server line featuring low power, low noise and small footprint optimized for special server appliance applications.

Our innovative Double-Sided Storage provide a high density 45 3.5-inch hard drive or APA 2.5-inch hard drive in 4U with the ability of hot-plug from front and back sides. Our 8-way system is a target at a high-end enterprise mission critical applications with the needs of huge memory capacity and tremendous computing power.

Now, Super SBB, Storage Bridge Bay, which uses our Twin design concept, can incorporate our bridge setup first and fiber channel storage for mission critical storage solutions. Our SuperRack simplifies the cable management and maximizes the air flow for complicated rack mount configurations. It also allows easy components access from front and back, extremely optimize for our Twin and Double-Sided architecture.

And our 10G switch for Blade and standalone box [ph] are in leading position in performance and cost, as we enter the 10G Ethernet era. And our MicroCloud is an optimized solution for web hosting and cloud applications in an extremely low power consumption and high density configuration.

In summary, we have built a strong foundation in our global operations and in our engineering capability. Our engineering foundation had provided Super Micro with the strongest product lines in our history and most innovative products in the industry. We look forward to promoting these product lines in the coming quarter and beyond.

For more specifics on the second quarter, let me turn it over to Howard.

Howard Hideshima

Thank you, Charles. And good afternoon, everyone. I’ll 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 detail in the slide presentation accompanying this conference call.

Let me begin with a review of the second quarter income statement. Please turn to slide eight. Revenue was a record $240.8 million, up 32.3% from the same quarter a year ago and up 16.2% sequentially. The increase in revenue from last year was fairly widespread among our customers and our product base, which we believe was primarily due to the server refresh cycle and the continuing ramp of our optimized products.

The sequential increase in revenue was primarily due to the continued emphasis being put on obtaining efficient and effective solutions and spread across our optimized product lines. On a percentage basis, Blades and GPUs were the highest growth both sequentially and from last year.

Slide nine. Turning to product mix, a portion of our revenue from server systems was 40.5%, which was an increase from 36.0% a year ago and 35.7% last quarter. ASP per server was about $1,600 per unit, which is up from about $1,400 and $1,500 per unit last year and last quarter respectively. The increase in absolute dollars of server products from a year ago was primarily due to the increase in shipments of across our server product lines. The increase in absolute dollars of server products sequentially was primarily due to a widespread increase in shipments of servers primarily toward our OEM and in customers.

We shipped approximately 61,000 servers and 957,000 sub-systems and accessories in the second quarter. We continue to maintain a diverse revenue base, with none of our over 500 customers making up more than 10% of our net sales in the second quarter. Furthermore, 57.3% of our revenues came from the US and 53.7% from our distributors and resellers.

Internet data center revenue was 9.4%, which was an increase from the prior quarter of 7. 6%. Asia and Europe revenues continue to grow faster than the US. We continue to expand our operations overseas, and we will be breaking down on our Taiwan facility shortly.

Slide 10 and 11. Non-GAAP gross profit was $40.4 million, up 32.4% from $30.5 million in the same quarter last year and up 21.3% from $33.2 million sequentially. On a percentage basis, gross margin was 16.8%, up from 16.7% a year ago and up from 16.0% sequentially.

Price changes from Ablecom resulted in a positive 12 basis point change to gross profit in the quarter, and total purchases represented approximately 23.1% of total cost of goods sold compared to 26.5% a year ago and 20.9% sequentially. The increase in gross margin primarily resulted from a higher percentage of sales of complete server solutions, as noted earlier, as well as the cost of our components offset in part by higher inventory reserves during the period.

Slide 12. Operating expenses were $21.6 million, up from $16.4 million in the same quarter a year ago and from $18.7 million sequentially. As a percentage of revenue, operating expenses was 9%, which is the same as a year ago and sequentially. Operating expenses was higher on an absolute dollar basis year-over-year primarily due to additional headcount in R&D and production as the company continued investment into its product portfolio as well as to expand its operations both domestically and overseas.

Sequentially, we saw an increase primarily in R&D personnel expenses related to an increase in headcount and bonuses, as well as materials used in the launch of new products, as mentioned previously, to prepare the company for additional growth. Headcount increased by 56 sequentially to 1,136 total employees. The increase was primarily in production and R&D.

Operating profit was $18.8 million or 7.8% of revenue, up from $14.1 million or 7.7% of revenue a year ago and up from $14.6 million or 7.0% of revenue sequentially. The improvement in our operating margin from last quarter and last year has been done while growing our revenue base, expanding our product line, and increasing our geographical capabilities. We do expect to continue to make these investments and continue our progress toward the long-term profitability and success of the company.

Net income was a record $13.3 million or 5.5% of revenue, up from $9.2 million or 5.1% of revenue a year ago and up from $9.3 million or 4.5% of revenues sequentially. Our non-GAAP fully diluted EPS was $0.31 per share, up $0.09 from $0.22 a share a year ago and sequentially. The number of fully diluted shares used in the second quarter was 42,691,000. The increase in diluted shares from last year was primarily due to the impact of options, which were previously under water.

The tax rate in the second quarter on a non-GAAP basis was 28.3% compared to 34.1% a year ago and 35.8% sequentially. The R&D tax credit, which expired on January 1, 2010, was reinstated retroactively during the second quarter. This resulted in an additional $0.02 to the non-GAAP fully diluted EPS for the catch-up in tax credits from prior periods. Without this catch-up, our non-GAAP fully diluted EPS would have been $0.29 per share on a tax rate of 34%. We expect the effective tax rate on a non-GAAP basis to be approximately 33.5% for the March quarter.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and short and long-term investments were $92.7 million, which is up from $89.4 million in the prior quarter. In the second quarter, free cash flow was a positive $3 million, and the net change in cash was a positive $3.7 million.

Slide 14. Accounts receivable increased by $6 million to $77.8 million, and DSOs was 29 days, a decrease of three days from the prior quarter. Inventories increased by $36.1 million to $187.6 million, with days in inventory increasing by two days to 78 days. The increase in inventory was due in part to prepare for a continued growth in our business and the effect is (inaudible) upon shipments from Asia. In the future, we do anticipate some increase in inventory as we continue to ramp our overseas facilities.

Accounts payable increased by $30.9 million to $144.0 million, with the days payable outstanding increasing by four days to 59 days, primarily due to the increase in inventory. Overall, cash conversion cycle days were 48 days, a decrease of five days from 53 days in the prior quarter.

Now for a few comments on our outlook. As indicated previously, during the second quarter we saw continued growth in our business, especially in Asia and Europe, and the ramping of sales across our product lines. We expect to see continued ramping of these and other products as well as ramping of our facilities, especially in Taiwan. For the Taiwan facility, we expect to incur about $15 million to $20 million of additional capital expenditures through the calendar year end. In addition, we are preparing for new technology launches such as Sandy Bridge from Intel. However, March (inaudible) weak quarter for the industry.

Therefore, the company currently expects net sales for the quarter ending March 31, 2011 in a range of $235 million to $245 million. Assuming the revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.25 to $0.29 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. Super Micro did finish a very strong quarter with another record high. As we look forward to 2011, we are confident that our strong and improving foundation will continue our momentum for growth. We have planned ahead for our important technology change that will occur this year. And we are, again, focused to be the best in performance and to be the first to market. In 2011, we will continue to expand our global system integration facilities and service centers to grow in various markets. As always, we plan for great growth and profitability, and we will do so by staying balanced and focused on our strategy.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) We’ll go first to Rajesh Ghai with ThinkEquity.

Noah Huth – ThinkEquity

Hi, this is Noah Huth speaking on behalf of Rajesh Ghai. A question for Howard. Last quarter you mentioned that there is a number of positive factors that were going to be helping drive the gross margins higher, and I think those were lower component costs, lower freight costs with the new European facility and new multi-core processors, which are going to carry higher margins. So it seems like at least two of those have already materialized this quarter. I was just wondering if you could provide some color as to how each of those will affect gross margins going forward and what kind of additional expansion we can see from them?

Howard Hideshima

This is Howard. And again – yes, I mentioned those last quarter. Again, we saw some positive benefits that I mentioned with regards to component pricing for us that we continue to execute our strategy of growing our scale. I think, as I mentioned, we are expanding overseas. As Charles mentioned, we continue to invest overseas. We’ll still be complying with that, but we are at the beginning stage of that. We do expect in the future to have positive effect on our expenses going forward with that.

Noah Huth – ThinkEquity

Okay. Thank you.

Operator

And next we’ll hear from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yes, thanks. Congratulations on the quarter, guys. When I look at the mix of your business, obviously it looks like you hit a fairly high mark here relative to last several quarters. Between systems and subsystems, how are you guys thinking about the mix going into the March quarter and then even beyond that? Are we at a new level that we’re kind of building off towards that 50% contribution? Or could you see us go back into that mid-35 – mid-30% contribution over the coming quarters again?

Howard Hideshima

Hi, Aaron, this is Howard. I think we’ve always said that long-term we’ve been trying to get about a 50/50 balance in the last couple years and we’re executing for that. I think that’s the way to put it.

Aaron Rakers – Stifel Nicolaus

And can you just – on the follow-up, can you talk a little bit about linearity in the quarter? I know that there has been – I think VMware was out earlier this week talking about flattish server shipment assumption for the x86 server market. What have you seen from a demand perspective linearity in this last quarter overall?

Howard Hideshima

Yes. Historically, this company has been very linear within its quarters. As I’ve mentioned before, and this past quarter, we didn’t see any difference with regards to that. It’s been fairly linear.

Aaron Rakers – Stifel Nicolaus

Okay. I’ll get back in queue.

Operator

And from Merriman & Company, Alex Kurtz.

Alex Kurtz – Merriman & Company

Yes. Thanks, guys. Nice execution on the gross margin. So, Howard, given the higher margins that are associated with the servers, just a follow-up to the previous question, I mean, are you assuming in your guidance servers being at least flat from a unit shipment perspective or do you think there’s some shift in ASP that we should consider models for the March quarter?

Howard Hideshima

I think one thing that you should take a look at. Again, I mentioned that the Internet datacenter revenues were up. And as we talked before, that’s a little bit project-based. So again, that could be in and out, and that contributes primarily to server solutions.

Alex Kurtz – Merriman & Company

Okay. So it sounds like the Internet datacenter space was sort of, I want to call, one-time factor, but yet you saw a nice lump-sum of sort of project coming out of that sector. And you wouldn’t expect that in the March quarter?

Howard Hideshima

I won’t say we wouldn’t expect it. It’s just something that comes as it comes, I guess.

Alex Kurtz – Merriman & Company

All right. Thanks, guys.

Operator

Next we’ll hear from Glenn Hanus with Needham & Company.

Glenn Hanus – Needham & Company

Howard, maybe we could focus on operating expenses. Pretty healthy growth, especially in R&D sequentially this quarter. Could you comment on your plans with some of that – this quarter with some of that sort of one-time in nature and not all really headcount-related and might we see sort of a flattening of OpEx now for the next couple of quarters?

Charles Liang

I guess our growth will continue to be very consistent, except in last two years we had spent a lot of effort to expand our integration capacity in Europe and R&D and integration in Taipei. So those investments have been in production, and that’s why you see our economy of scale had been growing (inaudible) Taiwan in Europe. So this trend will continue. So talking about investment and R&D headcount, I believe more than ever before, we will continue to grow, but our economy of scale had been growing – improving, I mean.

Glenn Hanus – Needham & Company

Okay. Thank you.

Operator

And next we’ll hear from Nehal Chokshi with Technology Insights Research.

Nehal Chokshi – Technology Insights Research

Yes, thanks. You commented on your strong systems year-over-year growth that was – part of it with the OEM customer ramping quite well. Do you have any sense of – can you share with us rather where you think you are in terms of innings with the ramp of your various OEM customer relationships?

Charles Liang

Indeed our growth had been very good in both areas. One is our OEM. The other one is a direct account. I would anticipate both segments (inaudible). And because we have a high mix of product line and also high mix of customer, so I believe our growth in direct account for OEM and end user will continue to grow with good balance.

Nehal Chokshi – Technology Insights Research

Okay. And I also have an additional question, more with I guess the channel-based revenue. Do you have a sense as to what is the average age of your customer servers, especially with respect to what is believed to be, I guess, around 3.5 years industry-wide?

Howard Hideshima

Nehal, this is Howard. Like I said, I see a range of – some of our customers have servers up out there for quite a bit of time. But really the technology is changing quite rapidly. And so we’re finding that the benefits that we are providing from efficiency and power are being adopted even faster. So again, I think this cycle is going even faster than it had been before, especially with the new technology launches, as Charles has talked about there. Things look pretty bright for us.

Nehal Chokshi – Technology Insights Research

Okay. Thanks.

Operator

(Operator instructions) We’ll go back to Aaron Rakers.

Aaron Rakers – Stifel Nicolaus

Hey, guys. Can you talk – earlier question was brought up around component availability. It looks like your inventory was up a bit on a sequential basis. Can you just update us what you are seeing on the component environment here as we move into 2011?

Charles Liang

Yes. Indeed, since about two or three months ago, we started to see components availability become much better, especially price has been absorbed in the last two to three months. And that’s why in the last quarter we did not have shortage problem basically. And looking forward, Q1 this year, basically supply position will be in good shape. As well, inventory grow, like Howard just mentioned, because they are Chinese Lunar New Year timing. So we had built up inventory, not that meant our inventory higher. Also, we believe the business we’ll continue to grow consistently. That’s why we also need to have a basically higher inventory labor.

Aaron Rakers – Stifel Nicolaus

And then the other question I have is on your Europe facility ramp, where do we stand relative to kind of the production that you guys can fulfill out of that facility relative to what you’ve done this past quarter?

Charles Liang

Our European integration capacity will continue to grow consistently. However, it won’t happen overnight, right? So European and Taipei, those locations, we saw consistent growing curve. And we are prepared for that. And there is another reason why we have higher inventory, because we now had to prepare inventory for Europe and Taipei as well. So when our economies of scale grows in both (inaudible) and Taipei, our business will improve as well.

Aaron Rakers – Stifel Nicolaus

Okay. Thank you.

Charles Liang

Thank you.

Operator

And we’ll go back to Alex Kurtz.

Alex Kurtz – Merriman & Company

Yes. Thanks, guys, for the follow-up. Howard, in the past, some of those large datacenter projects at low margin. And maybe we should just say that they are taking advantage of certain processes or transitions in any given quarter. But here we are. We’re just, in December quarter, calling quarter those customers as potentially helping gross margins. So can you help sort of reconcile that?

Howard Hideshima

I think once upon a time we talked about our entry into the Internet datacenters to help us to build scale. I think that still holds true for us that they’ve helped us build scale. And as I mentioned, our component being able to build scale allows us to get their pricing with our vendors and therefore help our margins. So strategically it’s going the right way.

Charles Liang

Yes. And indeed, when the economies of scale continue to grow, that’s how (inaudible). So that indeed had become more positive now. And also, indeed we are very selective. And so the good thing that we have some good choice to pick up a higher end, newer product for their segments, in those segments, indeed the margin had been good.

Alex Kurtz – Merriman & Company

Yes. But just as a follow-up, Howard, there were definitely some instances a couple of quarters ago where you guys took some low-margin deals with some large customers. Charles making it sound like maybe you guys are being a little bit more leveraged with these customers and you can walk away from less attractive deals. Is that what you’re saying, Charles?

Charles Liang

Yes, basically. We, for sure, with limited pedestrian capacity, for sure, we had to also selective.

Alex Kurtz – Merriman & Company

Okay. Thank you.

Operator

And we’ll go back to Glenn.

Glenn Hanus – Needham & Company

Hi. Could you talk a little more about growth drivers in the next couple quarters from a product perspective? You were very strong in blades, doubling quarter-on-quarter and the GPU Blade I guess. Can you elaborate on what to expect for the next few quarters?

Charles Liang

Yes. Indeed, our price finally started to grow quickly. That’s a very good sign; especially recently we just had a GPU Blade that offered highest density and also highest performance per watt to especially HPC applications. Our GPU product line continues to grow sharply. And also, we introduced more storage platform kind of quarter-by-quarter. So all of those will make our business continue to grow strongly, especially the growth in Asia. With now our integration center in Taipei available, we are able to support a customer in Asia much more efficient than before.

Glenn Hanus – Needham & Company

And maybe just kind of at a higher level, you guys have a lot of visibility into different verticals and GOs. Can you talk about sort of the relative strengths and weaknesses you are seeing from those perspective?

Charles Liang

Yes. I believe our Europe and Asia integration scale is still small, although it is ramping consistently. So we are paying some price for that. However, that in turn will be coming soon. So we are happy to do those investments. The USA location now, economic scale has been much better than before. That’s why probably the margins have been improving consistently.

Glenn Hanus – Needham & Company

More from – just kind of a market demand standpoint, as you look at across GOs and verticals, can you just elaborate a little bit on what you are seeing?

Howard Hideshima

Yes. To further out by Charles’ comments, I think because of the production facilities we got going on over there we see particular strength in Europe and Asia. Quite frankly, as I mentioned earlier, those two GOs on a percentage basis grew faster actually than the US for us. We’re seeing great strength out there and great opportunities for us over there, as we alluded to before.

Glenn Hanus – Needham & Company

Yes. Other just seasonal integration, indeed we also start to grow our sales and marketing force in both Europe and Asia market. And we believe it (inaudible) territory first.

Glenn Hanus – Needham & Company

Okay. Thank you.

Operator

And this does conclude our question-and-answer session. And I would like turn the conference back over to Mr. Liang for any closing comments.

Charles Liang

All right. 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 greater day.

Operator

Thank you. Ladies and gentlemen, does conclude this Super Micro second quarter fiscal year 2011 conference call. We do appreciate your participation. You may now disconnect at this time. Thank you.

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