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Executives

Perry Hayes – SVP, IR

Charles Liang – Chairman and CEO

Howard Hideshima – CFO

Analysts

Mark Kelleher – Dougherty & Company

Aaron Rakers – Stifel Nicolaus

Rajesh Ghai – ThinkEquity

Glenn Hanus – Needham

Alex Kurtz – Sterne Agee

Super Micro Computer, Inc. (SMCI) F3Q12 Earnings Conference Call April 24, 2012 5:00 PM ET

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Inc. Third quarter fiscal 2012 conference call. The company’s news release issued earlier today is available on the company’s website at www.supermicro.com. In addition, during today’s call, the company will refer to a slide presentation that has been available to all participants which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the investor relations sections under the events and presentations tab.

During the company’s presentation our participants will be in a listen only mode. Afterwards security analysts and institutional portfolio managers will be invited to participate in a question and answer session. But the entire call is open to all participants in a listen only basis. As a reminder, this call is being recorded, Tuesday, April 24, 2012. A replay of the call will be accessible until midnight, May 8th, by dialing 877-870-5176 and entering the conference ID number 6746870. International callers should dial 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 2012, which ended March 31, 2012.

Before we begin, I’d like to advise you of upcoming investor conferences at which Super Micro will be participating. On May 24th, we will attend the SternAG Technology 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 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 Presentation 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 2011, and our other SEC filings. All those documents are available from the investor relations page of Super Micro’s website at www.supermicro.com. We assume no obligation to update any forward looking statements.

Most of today’s presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to Slide 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 with 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. Let me start by sharing the fact that we grew the Q3 revenue year over year by only 2.5% mainly because of our finance drop that cause quarter wide hard drive shortage which affected us badly while into the quarter. In addition, not long ago, we showed the New Sandy Bridge Xeon platform from coming just before the end of the quarter was there to achieve meaningful revenue lift in the last quarter.

Some customers anticipate the technology transition and decide to postpone acquisition until the new product launch. With these issue result is behind us now, we are in a very good position for strong growth for next several quarters.

Please come to slide four. Now let me provide you with the financial highlights of our third quarter. The third quarter revenue was $240.2 million, about 3.9% lower than last quarter and 2.5% higher year-over-year. Non-GAAP net income was $8.8 million or 21.1% around quarter-over-quarter and 28.1% compared to last year. Super Micro’s non-GAAP earnings per share was $0.19 per diluted share compared to $0.25 last quarter or $0.28 last year.

From a geographic perspective, this quarter in United States account for 56.5% of revenue. Europe was 23% and Asia was 18.1%. Sequentially all our region were essentially flat from the prior quarter. On a year-over-year base, the US was 2.9% higher while Asia was slowed by 1.8%, Europe was basically flat with the year ago.

Last of the OEM and direct accounts – and direct customer account for over 47.4% of revenue, and Internet data center was 15.7% of total revenue. Of that result all that strong OEM and direct business. System sales continue to be a strong and reached record high 48.5% over sales. We had many successful deals and our completed racks system solution which enabled customer to immediately provide their order at the reception.

Customers are very satisfied with the plug and play experience and service at a record level offered by Super Micro. Therefore I expect this strong momentum of competency in business to continue. The coming June quarter performance is looking very positive simply because, first, we have no hard drives shortage problem now. Second, the Sandy Bridge Process both are in high volume production with strong customer demand.

Three, we are more ready for a complete data center and Cloud solutions including fully installed and tested rack solution and software. Number four, more customers to take advantage of our new Asia integration and logistics facility. These are just to start and we will have more reasons for strong growth after that quarter passes. Now, let me come in a little more on tests about our situation than last quarter. The hard drives, was in shortage for almost the whole quarter due to the flood.

Especially in the first two months compared to Tier 1 impact much more than this. We work very hard this quarter to strengthen our relationship with key hard driver manufacturers. And we were successful in these efforts. Long-term contract were drawn and that design was that our allocation over hard driver lastly improved by the end of the quarter. We see the situation is now getting back to a tightened, broadened conditions.

And now, hard drivers shortage issue is basically (inaudible). The launch of Sandy Bridge Process which came essentially at the end of our March quarter. Demand contributed much to our Q3 revenue. After that result, you are unable to immediately offset our investment post. And our profitability was impacted. However, our early assembling program, with the most of our customers indicates that the men for those processes.

In the future quarter, we have been very strong. In particular, at quarter end, we have one large to repair the Super Micro postponed to the Q4. Even now for this delay last quarter, our performance could have been much stronger. That is of our Sandy Bridge product launch is mainly due to our large investment in the R&D. In the past two years, we add 63% more engineers to our R&D group. We have made this investment in engineering because we know that transition to a new process perform is the most critical time to – critical time to maintain our time market advantage and driven strong in technology innovation.

In that short-term, the investment made us on our engineering team in our current financial performance. However, in the future, both is the choice of application optimized product will where enable us to grow faster and to a new neighbors.

Now, I would like to provide you with updates on our capacity expansion. Our – in 2000, our new line into Taiwan facilities remain on track and we now have three new lines already operational. As we have said previously, the Taiwan facility will improve the logistical foundation of Super Micro, which would lead to a lower production and logistic cost, and it will allow us to grow more quickly in Asia as well as in Europe.

We plan that Taiwan facility will be fully ramped by later this calendar year and we will continue to serve key Asia and European customers during this place. As far as our current products, the Blade can grow strongly year-over-year and started to continue to grow steadily from that year. Rack solutions and GPU remain strong much interest in the sales results our MicroCloud has been very good and we believe that MicroCloud is shaping up to be a strong product line. Our R&D product, such as networking suite and airway service also continue to grow.

Looking ahead, the technology transition to Sandy Bridge has now officially begun and will be the main drive for growth over the next several quarters. We expect a server to flash backup to create a stronger demand for increased performance and lower power consumption servers and storage products. Our new Fat Twin server storage product line is the most outstanding is improved, which mix is our server consumed that energy power via helping customer to realize that datacenter is much easier.

In addition, that UPI, we have launched this quarter and the 22 nanometer design. We have provided even where their performance put on us. Therefore, we are excited about our technology transition and given our heavy investment in that. We are well-positioned with upgraded product line to provide a monthly use of the both of the choice of product.

Let me now update you with multiple on our new and leading technologies, which is 30% mostly compared to our previous X8 generation. We will be provide demand (inaudible) and for given market segments. This system featured our new generation high-efficiency digital power supplies and that can reach 95% efficiency in typical applications and improve both lights and heavy loaded efficiency as well.

We will also be pushing the foundry of good in computing by offering product that operate in high temperature, 47°C. These solutions, we will make them become easier. And have a customer achieving that PUE of 1.1 or even better. Later this quarter, we will introduce it as I mentioned. We had proposed today with a mission for competitive reasons. These twin based product line we will combine faster performance. Later performance per watt higher storage capacity and higher flexibility that will make, SMCI the most of the competitive product in that data center market. We are very excited about these new product line, which viewed on the twin innovation that we highly need several years ago.

Our CPU optimize the product line in 1U, 2U, 4U and (inaudible) provide extreme performance in calculation where this intensity applications. And had been the most popular CPU service in the market. The new X9 innovation CPU that we changed have designed to support our upcoming new generation CPU’s. Higher capacity PCI-E fresh, our new workstation product nine featured a new workstation in with a high vicinity super quite power supply and hard performance the IO support.

Our new specialized server and workstation product nine to support our ever risk processor optimize for HFT, a high frequency trading applications account user. We had just released our new high volume standalone switch product two weeks ago. We are also continuing to expand our offer rate of optimize 10G and (inaudible) solution to our crowd and better tender customers.

Our switch product are in the leading position in performance and costs. Super Micro’s there are tender management so that (inaudible) with DCF and it has been where half present a total solution to our customers. Our tested site had converted to flow user and we had just begun to recognize the revenue on sale of this software. We believe this is only the beginning of our ability to provide the best hardware and software solutions to our customers.

Our completed rack solution had been successfully deployed to many centers now with our increasing engineering expertise and extensive testing the direct shipment of completed rack provides the customer is tenuously the power own convenience and trouble-free experience. We are expecting a possible gross of our completed rack solution business. For most of the specifics on the second quarter let me turn it over to Howard.

Howard Hideshima

Thank you, Charles, and good afternoon everyone. I will focus my remarks on earnings, gross margin operating expenses and similar items on a non-GAAP basis which reflects adjustment to exclude stock compensation expenses. Reconciliation of GAAP to non-GAAP is included in the financial statements of the company in today’s earnings release and in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with the review of the third-quarter income statement.

Please turn to slide eight. Revenue was $240.2 million up 2.5% from the same quarter a year ago and down 3.9% sequentially. The increase in revenue from last year was primarily due to continuing ramp of new product platforms as we have continued to expand during the past year especially in our (inaudible) product lines as well as ramp of our full rack solutions. The sequential decrease in revenue from last quarter was not only due to the seasonal weakness, our storage and hard disk drive and the Sandy Bridge transition. On a percentage basis, (inaudible) MicroClouds were the fastest growing product lines from the prior quarter.

Slide nine. Turning to product mix. The proportion of revenues from server systems was 48.5%, which was an increase from 31.8% a year ago and from 44% last quarter. ASPs for the servers was $2000 per unit, which is up from $1400 last year and from $1800 last quarter. We shipped approximately 57,000 servers in the third quarter and 1,212,000 subsystems and accessories.

We continue to maintain a diverse revenue base with over 500 customers with none of these customers representing more than 10% of our quarterly revenues. Internet data center revenue was 15.7%, which was an increase from 9.7% in the prior quarter. Furthermore, 56.5% of our revenues came from the U. S. and 52.6% from our distributors and resellers.

Slide 10 and 11. Non-GAAP gross profit was $40.9 million, up (inaudible) from $38.1 million in the same quarter last year and down 4.4% from $42.8 million sequentially. On a percentage basis, gross margin was 17%, up from 16.2% a year ago and comparable to 17.1% sequentially. Price changes from Ablecom resulted in no change to gross profit in the quarter and total purchases represented approximately 20.1% of total cost of goods sold compared to 20.3% a year ago and 18.5% sequentially.

The year-over-year increase in gross margin resulted from some increase in the sale of server solutions, which typically have higher margins. Sequentially, gross margins were comparable, the increase in revenues offset the higher margins from hard disk drive sales in the second quarter.

Slide 12. Operating expenses were $28.7 million, up from $20.8 million in the same quarter a year ago and up from $26.6 million sequentially. As a percentage of revenue, operating expenses was 11.9% up from 8.9% last year and 10.6% sequentially. Operating expenses were higher on an absolute dollar basis year-over-year and sequentially. The year-over-year increase was primarily in R&D as we continue to invest in our product portfolio especially in preparation for the Sandy Bridge launch, which occurred on March 6.

Sequentially, we saw an increase in operating expenses of about $2.1 million primarily due to R&D expenses growing by about 900K related to salaries and benefits to support new technology launches such as Sat Twin and software solution and $300,000 less in our fees from our customers. In addition, general and administrative expenses grew by about $400,000 primarily due to an increase in legal expense surrounding a patent full case filed in the third quarter.

The company’s head count increased by 58 sequentially to 1453 total employees, primarily in R&D. Operating profit was $12.2 million, or 5.1% of revenue, down by $5 million, or 29.3% from $17.2 million a year ago and down $1 million or 24.9% from $16.2 million sequentially. Net income was $8.8 million, or 3.7% of revenues, down $3.4 million, or 28.1% from $12.3 million a year ago and down $2.4 million, or 21.1% from $11.2 million sequentially.

Our non-GAAP fully diluted EPS was $0.19 per share, down $0.09 from $0.28 per share a year ago, and $0.06 from $0.25 per share sequentially. The number of fully diluted shares used in the third quarter was $45.5 million. The tax rate for the third quarter on a non-GAAP basis was 26.6% compared to 28.3% a year ago, and 30.5% sequentially. The decrease in tax rate from prior year was primarily due to R&D credit true-up. We expect expected tax rate on a non-GAAP basis to be approximately 30% for the June quarter, which is higher than the 26% in the same quarter last year, since you we only have six months of R&D credit this fiscal year.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and long and short-term investments were $92.2 million, down $13.9 million from a $106.1 million in the prior quarter and up $18.7 million from $73.5 million in the same quarter last year. In the third quarter free cash flow was a negative of $21.3 million.

Slide 14, accounts receivable increased by $20.9 million to a $101 million with days sales outstanding was 35 days, an increase of four days from the prior quarter. The company has actively reduced the discount it provides customers for TT shipments by about 75 basis points.

Inventories increased by $35.6 million to $228.9 million with days in inventories increasing but 12 days to 97 days. The increase in inventory was due in part to preparing for the seasonally strong quarter. The increase in demand following the Sandy Bridge launch, replacing hard disk drive inventory levels, which were reduced due to the flood as well as products for appending shipment for a large product, which we did not ship in the third quarter, but is expected to ship this quarter.

Accounts payable increased by $26.3 million to $142.2 million, with the days payable outstanding increasing by seven days to 60 days, primarily due to the increase in inventory as mentioned above. Overall cash convergence cycle were 72 days an increase in 98 for 63 days in the prior quarter. The overall ratio is noted above our similar to the trend, which we have coming into the March quarter, which you seasonally saw going into a seasonally strong June quarter. Some of this has been increased with the replenishment of hard disk drive, inventory levels and the ramping of the normally product line.

And now for a few comments on our outlook. As indicated, previously during the third quarter we saw strength in our customer base and as started ramping Sandy Bridge solutions or we did have some delays caused by shortages and hard disk drives and transition of Sandy Bridge products. The situation has improved. As mentioned before we have entered into long-term supply agreements with our hard disk drive suppliers and continue to ramp our production of Sandy Bridge products.

So as we entered the June quarter, which is seasonally a strong quarter for the industry we are ramping Sandy Bridge products and/or proved our supply agreements on a hard disk drive and continue to increase production in our Thailand facility. As we enter this technology refresh cycle we are strongly positioned from our product and operations perspective.

Therefore the company currently expect net sales for this quarter ending June 30, 2012 in the range of $280 million to $310 million, which at the midpoint is about 23% increase sequentially and 13% increase from the prior year, assuming those revenue range the company expects long gap earnings per diluted share of approximately $0.27 to $0.32 for the quarter.

It is effective that the outlook will not be update until the release of company’s next quarterly earnings announcements. Now withstanding subsequent development however the company may uptake the outlook for any portion there out at any time.

With that let me turn back to Charle, for closing remarks.

Charles Liang

Thank you Howard. In summary chip micro ahead spent that’s the many quarters prepare you for the upcoming servers cycle. Based on the Cindy bridge. Our investment in R&D new system architecture there are things sought that we are poor our global production and logistics facility positioned us for our next strong line b’day cycle. We had achievable micro from that beginning to foot to market to Maki advantage of technology transitions. Our engineering team has produced the strongest and above the to put online than in a competition. Later in the year 20trails where the year of technology transition to Sandy bridge and Supermicro is ready for challenge and opportunity.

Operator at this time we ready for questions.

Question-and-Answer Session

Operator

All right. Thank you Sir. Well ladies and gentlemen our question-and-answer session will be conducted electronically. (Operator Instructions). I’ll take your first question from Mark Kelleher with Dougherty & Company.

Mark Kelleher – Dougherty & Company

Great. Good afternoon. Thanks for taking the question. You mentioned that there were some customer order delays waiting for the new technology transition and you indicated there were some effects on the revenue from the hard disk drive storages. Can you kind of cite those which one had more of an effect?

Howard Hideshima

Hey, Mark. This is Howard. Yeah, we mentioned one customer that we had shipment that was delayed and so it was less than 10% customer per se. So again, we’re not disclosing too much for confidentiality reasons, but it was along that magnitude. The hard disk drives certainly did play also into the some of the delays and shipments that we did have and although not the magnitude of December period time March was more so.

Mark Kelleher – Dougherty & Company

All right. And on the gross margin side, the Taiwan opening, the manufacturing, did that have much of an effect either way in the quarter?

Howard Hideshima

It had some. Obviously, we’re not at full capacity there as of yet. So we have more expenses and we’re recovering our investments at SAT, but it is good for us.

Mark Kelleher – Dougherty & Company

But it did have much of an effect either way on gross margin?

Howard Hideshima

It did have some on a negative basis. Yeah.

Mark Kelleher – Dougherty & Company

Okay. And last question is on R&D. You did ramp that up a bit in the quarter. Is this – as a percentage of sales, this is a sustainable level that we should expect going forward?

Charles Liang

Indeed, R&D aggravated in last many quarters. We had grown engineering resource and that for sure have some impact to our financial reports. However, most products have been finished developing. So now we yet start to (inaudible) and our profitability. So R&D basically has much growth in terms of head count and investment now.

Mark Kelleher – Dougherty & Company

Okay. Great, thanks.

Operator

All right. Thank you very much. Now moving on, we’ll go to Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Yeah, thanks for taking my question. On the guidance, let’s just use the midpoint as the basis of your guidance range. How are we thinking about the mix between systems and subsystems in the current quarter?

Charles Liang

Looks like the complete the system we are continuing to grow. Again, at Sandy Bridge, we like that system because average being pushed to maximum based on the performance per watt and that’s why companies previously is very beneficial to customer. So next to your customer, when they receive, it’s already optimized reliable system that we have.

Aaron Rakers – Stifel Nicolaus

Let me ask you different way maybe. When we look at the last five years, I thing you’ve grown that sequentially about 15%. However, last year you grew that business sequentially in the fiscal fourth quarter about 40%. I’m just still trying to gauge underneath of that and giving the implications for the gross margin. Are we to assume 40% plus sequential growth, or something more normal seasonality. I would assume with the wrong way cycling, you’re assuming something that’s much higher than typical seasonality.

Charles Liang

Yeah. Right now, If you take the midpoint of the guidance, I think you’ll see like, as I mentioned, we probably have about 23% increase in revenue sequentially.

Aaron Rakers – Stifel Nicolaus

And then, the server mix, it’s trouble eluded to. Again we’re hoping that that’s going to increase, as we go long. Obviously, Sandy Bridge is a tougher product to implement. And so, this is allowing our engineers really to show, and the integrated solution is the best thing for the customers from a quality perspective.

Charles Liang

Especially now, we have a much stronger (inaudible) supply contracts and also memory support, the major support from original manufacturer.

Aaron Rakers – Stifel Nicolaus

Okay. So it sounds like you’re assuming not much of a change in your mix of the business?

Charles Liang

Yeah.

Aaron Rakers – Stifel Nicolaus

Okay. Follow-up from me would be is that when we’ve seen – we’ve discussed in the past prior server cycles, obviously in the – kind of the depths or the downturn and you really didn’t get the uplift from a pricing power perspective. I think you made the comment that you’ve taken some discounting of the table.

Your ASP’s continued to increase. Is it still fair for us to go back to the (inaudible) and use that as the benchmark for gross margin, potential upside or expansion as we think about the wrong way cycles over the coming quarters, or put more systemically 150, 200 basis points expansion of gross margin, is that a fair assumptions as we work through this wrongly cycle?

Howard Hideshima

I think so. And basically, we have our long-term model out there. We believe it’s achievable, that shows the 19 to 22 gross margin in the next year. So again, as we get into the cycle, as we fully utilize the Taiwan facility in the second half of this year, we see the ramp of the wrongly products or Sandy Bridge products. Those are all beneficial to us.

Charles Liang

And fair to be available.

Aaron Rakers – Stifel Nicolaus

Okay. Final thing from me would be is on the Internet data center vertical. I think, last time it was just high, I think, there was a somewhat of a large customers within that, that drove that business. How are we thinking about the visibility and that now 16% of revenue and what looks to be somewhat lumpy over the last couple of quarters due slightly the percentage of our datacenter and COU applications we’re continuing as we grow because, again I will put those solution compete or a rack we see even than it has been very attractive to those customer now. Okay. Thanks, guys.

Charles Liang

Thank you.

Operator

All right. Thank you, we’re moving to we’ll take a question from Rajesh Ghai with ThinkEquity.

Rajesh Ghai – ThinkEquity

Thanks. I wanted to dig deeper into what Howard already mentioned about getting into long-term supply contracts with your hard disk drive suppliers. So if we look ahead with your guidance, are you confident that the entire guidance range you will not have any obvious straight supply constraints in your fiscal fourth quarter?

Charles Liang

Kind of before we – we now have four more constraints between in – March, early March, finally we have a strong, much stronger partnership that’s what’s why we signed a contract, so I was surprised to be much more stable, and hopefully also stronger support.

Rajesh Ghai – ThinkEquity

So, you should be able to deliver everything that you have in your guidance that is one-time, there is no hard disk that could prevent you from hitting any part of your guidance into high end of the guidance?

Charles Liang

Yes. It should be much better position now.

Rajesh Ghai – ThinkEquity

Okay. And as far as you know the facilities are concerned, Thailand and Netherlands facilities are concerned, you talked about the Thailand facility kind of reaching full capacity by the end of the calendar year ‘12, is that right?

Charles Liang

Yeah. Basically, in the meanwhile, because of the hard drive shortage in Asia and in Europe, that is also very soon.

Rajesh Ghai – ThinkEquity

How do you expect demand to ramp for you guys after the fiscal Q4 would normally be, do you think it’s going to be – with the end of the year, or do you think demand should continue the ramp beyond the fiscal Q4 or do you think that they might be regular seasonality that you typically see in fiscal Q1?

Charles Liang

I guess, the decision we’re continuing for many quarters.

Rajesh Ghai – ThinkEquity

Does the ramp for raw material continue to ramp through the manner low three quarters this calendar year?

Charles Liang

Yes, it is, hopefully.

Rajesh Ghai – ThinkEquity

Okay. Thank you, so much.

Charles Liang

Thank you.

Operator

All right. Thank you very much. Now we’ll go to Glenn Hanus with Needham.

Glenn Hanus – Needham

Thanks. Let’s go back to your business model operating model for a second. You commented on the gross margin side, you think over the next year basically, you can kind of get through your 19% or 20% target there. And then I think your operating model is like 9% to 10% or so, is there a timeframe you think you can get so that? And how do you view the sustainability now if you can of maintaining an operating model up in around 9% or as we get into the next cycle out there, will we go back to something significantly below that, how should we think about that?

Howard Hideshima

Yeah, Glenn. This is Howard. Like I said, one-year target is what we’ve set out there. We’re holding to that basically from now. With regards to the levers to pull I think we are in, as Charles mentioned earlier, we’re in much better position with a variety of different products, technologies, operation perspectives to go off and really get to that operating model that we’ve discussed before or with the next year. And I think after this cycle again, we’re very well positioned and keep on doing the formula that we had here about pulling out the best products, application optimized and then fine tuning our operating model.

Glenn Hanus – Needham

Okay. Can we talk about the high-performance computing sector a little bit? You breakdown the Internet data centers as – it’s usually 10 and now this quarter was 15%. Can you talk about what are your other largest verticals and specifically talk about the high-performance computing sector. Obviously Mellanox had some really strong numbers type to that sector and is that a good growth area for you guys, especially over the rest of this calendar year?

Charles Liang

Yeah, HPC for sure is an area we focus on a lot. Especially our management software is getting available, just staying, we just start to charge a couple of customer with a colorful array of products. So with a completed solution, not just how do we have it now, some management software and computer rack solution. And our switch, out of mine also spiral high in production so all growth is where our HPC market.

Glenn Hanus – Needham

How would you, maybe you could talk about what you’re view as like your top five verticals. I know you’re not going to give numbers or something. But you’re into that data center. With HPC being there may be commented on, what are your top five verticals really from an end-user market perspective and how are they doing?

Charles Liang

I can mention some, like the sales into HPC embedded, IPC in that storage.

Glenn Hanus – Needham

Okay, thank you.

Charles Liang

Thank you.

Operator

All right. Thank you. (Operator Instructions) And next moving on, we’ll go to Alex Kurtz with Sterne Agee.

Alex Kurtz – Sterne Agee

Yeah, thanks for taking the question, guys. So how are you? I just want to clarify one of Glenn’s question here. Did you say you’re going to hit 19% in the year? Did I hear that right or did I miss you that for gross margin?

Charles Liang

I guess it 15 months it’s some time next summer.

Alex Kurtz – Sterne Agee

Sometime in fiscal either end of fiscal and getting the fiscal ‘14 you will be hitting the low end of that gross margin range?

Charles Liang

That’s correct.

Alex Kurtz – Sterne Agee

Okay. So that implies pretty significant ramp from here and I guess that’s stems from the cycle that we are looking at here from Romley and then on top of that, again the Taiwanese build right and we should think about those being sort of equal contributors to that ?

Charles Liang

Yeah, if I think that third statement, Alex, again the Thailand facility we talked about the leverage we’re going to get out of that facility as we fill that one up coming into the end of the year and then further expanding that as the demand grows for us and as Charles mentioned, were ramp to beginning of this new technology refresh cycle with Sandy Bridge and we tried very good things there. All right, sorry, Sandy Bridge. So if I look back at the ASPs, Howard, on the component side this quarter it took a pretty big dip sequentially from 104 to like 100 or so if my math is right.

Alex Kurtz – Sterne Agee

You sort of take me through the pushes and the polls there on exactly why with that HDD related was as far as like that the drivers of that ASP decline on the – in the March quarter?

Howard Hideshima

Yeah, in the March quarter, I mean, we don’t see on the component side of it, it’s really don’t use that as much because and again it’s a mix of either cable or then you’ve got chip that kind of or the other things, so again it’s a real wide swing about what’s in that bucket, so we are really don’t have to track much on the ASPs on that side ?

Alex Kurtz – Sterne Agee

Okay. I guess from a modeling perspective does have an impact, but you also did see an increase sequentially on the server ASP and I guess that was without a full quarter you had some headwinds on HDD market and Sandy Bridge was really out there. So on a lower unit volume quarter-over-quarter, Howard, why was the ASP’s up a little bit?

Howard Hideshima

Yeah again selling more complete systems we had to – we did have some shortages with regards to our HDD so we try to push those and work toward our full service systems that with bare bones, so sell more fully populated system and that leads to higher ASP.

Alex Kurtz – Sterne Agee

Okay. It’s on a sequential basis.

Charles Liang

That’s correct. Okay.

Alex Kurtz – Sterne Agee

All right. Thanks guys.

Operator

All right. Thank you very much. We’ll now go back to a follow-up Aaron Rakers.

Aaron Rakers – Stifel Nicolaus

Yeah, thanks guys. One point of clarification, you guys have made a comment about hard disk drives having some negative impact on the gross margin. Would you be willing to talk about what the headwind it was, as far as that gross margin related to hard disk drives and do you expect that the lift as, you’ve got an (audio gap) availability becomes more adequate as we progress through the year.

Charles Liang

Yeah, for hard drive. Now we have a much more higher and also our boarding we are continuing to grow beginning. All knows we are a mega policy positive from a hard driver point of view.

Aaron Rakers – Stifel Nicolaus

But the hard disk drive did that situation is reflected in the 17% gross margin. There was a negative impact in your model because of that this quarter, correct?

Howard Hideshima

That’s correct. I mean, if you think back on the December quarter, we still had some inventory that we’re required at a lower cost right per hard disk drive. And as I stated in the December call, majority of our margin increase was due to a selling – basically gaining a high margin on those hard disk drives we already had an inventory. By the time December rolled around, we add up all that inventory coming into this quarter, we didn’t have that type of inventory and so we didn’t have that margin benefit from – our low-cost inventory.

Aaron Rakers – Stifel Nicolaus

And you weren’t able to pass all that the price increases through. Did you pass them?

Howard Hideshima

We are on the past increase, but more remember in December quarter, I had inventory that I required low cost before the flood happened (audio gap) and the prices increases happened, we had lower cost hard disk drives already in our inventory, right. But as I is sold those – I got higher margins on that during the December quarter. And you can look into the March quarter, I didn’t have that low-cost inventory to help my margins out this quarter.

Aaron Rakers – Stifel Nicolaus

And so, what I’m asking Howard’s started beating around the bush a little bit. What I’m asking is what was that headwind, on that gross margins in the March quarter?

Howard Hideshima

In the March quarter?

Aaron Rakers – Stifel Nicolaus

Yeah.

Howard Hideshima

Again, it was a majority so we had about – I think it was about hundred point basis move in the December quarter. I stated then that it was majority of that move in the December quarter. And so we didn’t have hardly at any of that this quarter.

Aaron Rakers – Stifel Nicolaus

Okay.

Howard Hideshima

Is that’s fair.

Aaron Rakers – Stifel Nicolaus

Yeah, that helped me a little bit. And then also, how are we modeling OpEx on a total basis going forward and then also how we modeling beyond the June quarter tax rate and then I’ll stop.

Charles Liang

Okay. With regards to the tax rate, let’s take that first because it’s little more unpredictable. I guess again, the R&D credit that it did expire in December, and historically they do they have historically re-initiated the R&D credit this year, I am losing a voting year you want to call that election year. So again lot more decreased visibility with regards to what’s going to happen.

However, it does happen again there is a catch up in that quarter for the passage of the R&D credit. So we got it this present quarter, the June quarter here for 30% non-GAAP tax rate. And I think if you look back, we have been guiding around 30%, 31% over the past year.

Aaron Rakers – Stifel Nicolaus

Okay. And then our OpEx at $28.7 million, I mean strive we continue to increase that in our model assumptions going forward?

Charles Liang

I think we’re going to continue invest although not at that rate that Charles mentioned already not at the rates because we’ve just gone through the launch of the Sandy Bridge Park prepared many of our parks for relief, and so we’re not going to go at the same rate that we had previously.

Aaron Rakers – Stifel Nicolaus

Okay. I’ll take it off-line, thanks.

Charles Liang

Okay.

Operator

Thank you very much. (Operator Instructions). All right, great. At this time, we have no further questions I would like to turn the call back over to Mr. Liang for any additional or closing remarks.

Charles Liang

Yeah, 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 thus conclude the Super Micro third quarter fiscal year 2012 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.

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