Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Super Micro Computer Inc. (NASDAQ:SMCI)

F2Q08 (Qtr End 12/31/2007) Earnings call

January 30, 2008 5:00 am ET

Executives

Howard Kalt - IR, Kalt Rosen Group/Ruder Finn

Charles Liang - Chairman and CEO

Howard Hideshima - CFO

Analysts

Glenn Hanus - Needham

Jeffery Hekaro - Merrill Lynch

Josh Sloan - Glacier Bay Capital

Kenneth Miller - Bonanza Capital

John Ralph - Argon Capital

Operator

Welcome to the Super Micro Computer, Incorporated, second quarter fiscal 2008 conference call. (Operator Instructions).

And now, I would like to turn the conference over to Mr. Howard Kalt, of Super Micro Computer, Inc. Mr. Kalt, please go ahead, sir.

Howard Kalt

Thank you, Ace. Good afternoon and thank you for attending Super Micro Computer's conference call on financial results for the second quarter of fiscal year 2008, which ended December 31, 2007.

With us today are Charles Liang, Chairman and Chief Executive Officer; and Howard Hideshima, Chief Financial Officer. By now, you should have received a copy of today's news release that was distributed at the close of regular trading. A copy of it maybe accessed on the company's website, www.supermicro.com.

Before we begin, please note that during the course of this conference call management will be making forward-looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934. These forward-looking statements may involve judgments based on information that is available now, but is highly likely to change over time.

The company will not necessarily inform you, if and when, those judgments and the underlying information change. Company policy is to provide material information only in news releases, widely-available conference calls, or filings with the SEC.

Additional information concerning factors that could cause actual result to differ, materially from those in today's forward-looking statements, are contained in the company's SEC filings, as well as in today's news release.

I would add that the company operates under the requirements of regulation FD. As a result, Super Micro Computer provided advanced notification of this conference call, by way of a news release issued on January 17, 2007. Like most companies, today we will be taking questions only from securities analysts and institutional portfolio managers, but the complete call is open to all interested parties on a listen-only basis.

The company will continue to talk with investors individually and in small groups, but those discussions will not include discussion of any material non-public information. If you're interested in such a meeting, please contact me at 415-692-3059 or via email on the company's investor relations website.

I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer. Charles?

Charles Liang

Thank you, Howard, and good afternoon everyone. This was a record high quarter for us in both revenue and profitability. Our revenue reached a record high of $136.9 million, growing $23 million or 21% compared to the same time last year. This quarter net income reached a record high of $7.7 million, up $2.7 million or 56% compared with last year.

Our leading edge products, like high efficiency power supply server UIO and 1U Twin servers were primary contributors to this increase in revenue and profitability. We consider Super Micro being the leader in providing energy, retaining twin servers to the industry for the past two years.

A year ago, we had achieved approximately 85% power-efficiency on some of our servers, while our industry average was at above 75% to 80% power-efficiency. We have continued our drive for innovation and have increased our power efficiency on some of our servers to 93% today, while our industry has moved to 80% to 90% maximum power-efficiency.

However, our driver for power-efficiency servers extended beyond just the power supply. We also optimize for power-efficiency at the components level, such as motherboard, memory subsystem, and chassis. While it may seem like relativity is more saving in power, they achieve some significant power savings on a completed server basis. These savings have been embraced by our customers as indicated by the growth in our business.

Most of our UIO and 1U Twin servers have increased significantly in revenue in the last three months. Customers appreciated a better IO bandwidth, flexibility, cost advantage, and investment protection, which the UIO provides.

Future upgrades can be achieved by replacing the UIO card and/or expansion card instead of replacing the entire system. Even without an UIO module or expansion cards, our UIO system functions as an extremely cost effective server. With UIO feature, a single UIO server can support many different SAS controllers, 10-gigabit Ethernet controller or InfiniBand controller. This versatility also minimizes the number of different server models that resellers need to keep in inventory.

The 1U Twin servers require half of many server racks, chassis, power-supplies and power cables, which reduces customers total cost of ownership to as long as PCU. Additional cost of savings associated with best IT space requires us, whereas each year maintenance and management make these servers a very attractive option for almost any high performance server application. Most of these platforms will continue to be optimized, with rather the space technology and design in order to meet the increasing needs of our customers.

Delivering innovative application optimizes server solutions and being first to the market has been hallmark of Super Micro. Our solutions help the customers grow their business, which in turn helps our growth. As has been proven by our increase in revenue and profitability, we will continue to invest in our infrastructure to support the continuing needs of our customers, order wise.

We have significantly extended our engineering capability and capacity, both here in San Jose and in Asia. We have also added small production resources to meet the demand of our customers. We are continuing to evaluate a site in Asia to extend our manufacturing and warehousing capacity in the near future, in order to reduce post production and logistical cost.

All of this is within our plan to grow our technical and operational capability and capacity to build a stronger foundation for our future, while maintaining our financial discipline and growing our shareholder value.

With that in mind, let me now turn it over to our CFO Howard Hideshima, who will discuss the financial results and forecast. Howard?

Howard Hideshima

Thank you Charles, and good afternoon everyone. First let me point out that our GAAP numbers appear in the news release while I will discuss 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.

Let me begin with the review of the second quarter income statement. Revenue of $136.9 million for the quarter was up 20.5% in the same quarter a year ago. The growth was lead by the increase in our server systems business, which increased 44.4% year-over-year, or $17.8 million to $58 million.

Unit volumes on server systems increased 29.4% year-over-year from 34,000 units to 44,000 units. ASPs for servers had also increased on a year-to-year basis from approximately $400 per unit to $1,300 per unit. The increase in server revenue was primarily due to higher sales of our OEMs and end customer solutions, utilizing our high-efficiency power supply and sales of new products, such as the UIO and 1U Twin.

We continue to maintain a diverse revenue base with none of our approximately 400 customers making up more than 10% of our net sales in the second quarter. Further more, 62.1% of our revenue came from the US and 60.9% coming from our distributors and retailers. Internet data center revenue was 12.3% compared to 8.8% in Q2 of fiscal year '07.

On a sequential basis, net revenues were up by $19 million or 16.1% from $117.9 million in Q1. Again, the increase was primarily due to an increase in the sales of UIO and high efficiency power products. Internet data center revenue was 12.3% compared to 8.6% in Q1 of fiscal year '08.

Non-GAAP gross profit was $27.4 million for the quarter, up 43.4% from $19.1 million in the same quarter last year. Non-GAAP gross margin was 20% of revenue, up from 16.8% a year ago. The non-GAAP gross margin increase from a year ago reflects three factors; first, higher revenue mix from computer server solutions; second, improvement in our cost of standard performance, such as memory, hard disk drive, which we had typically not provided a year ago; and third, our higher margins on newer products such as the UIO and 1U Twin, offset in part by higher inventory reserves in the second quarter of fiscal year '08 of approximately 1.8%.

On a sequential basis, non-GAAP gross margins increased from 19.6% in Q1 to 20% in Q2, due primarily to higher revenue of server solutions, which generally carried a higher margin exponent. On a year-over-year basis, non-GAAP operating expenses totaled $14.2 million for the second quarter or 10.4% of revenues, up from 9.6% a year ago.

The year-over-year absolute dollar increased $3.3 million and was primarily due to additional headcounts or between investments in our product lines, and the ramp in our revenues. The company's headcount grew by 186 from 548 at Q2 fiscal year '07 to 734 at Q2 fiscal year '08, primarily in the areas of R&D and production. Overseas headcount during this period expanded from 87 to 131 and is included in the total headcount number I just provided.

On a sequential basis, non-GAAP operating expenses were up $1.1 million or 8.4%. The company's headcount grew by 73 from 661 at Q1 fiscal year '07 to 734 at Q2 fiscal year '08, primarily in the areas of R&D and production. The increase in operating expenses was primarily due to the higher salary and payroll expenses associated with this headcount increase.

Non-GAAP operating profits for the second quarter were $13.2 million or 9.6% of revenue, up $5 million or 61.5% from $8.2 million a year ago. The increase was primarily due to our revenue and growth margins, offset in part by increase in our operating expense [is perfect] growth of the company and the overhead associated with being a public company.

Non-GAAP operating gross profit, on a sequentially basis, was up $3.1 million or 31% from $10.1 million or 8.5% of revenue in Q1, primarily related to the higher revenue and growth margins discussed above.

On a year-over-year basis non-GAAP net income for second quarter was $8.6 million or 6.2% of revenue, which is up $3.2 million or 60.5% from $5.3 million or 4.7% of revenue a year ago. On a sequentially basis, non-GAAP net income was up $2 million or 30.5% from $6.6 million in Q1. The tax rate in the second quarter on a non-GAAP basis was 36% compared to 32.3% a year ago.

The increase in our tax rate this quarter compared to last year was due to [catch up] in our benefits from R&D credits due to the timing of rational reinstatement or the tax credit last year. Our non-GAAP fully diluted EPS in the second quarter was 22% per share compared to $0.16 per share a year ago.

Fully diluted shares used were 38.9 million compared to 32.5 million a year ago. Fully-diluted shares increased by the 6.4 million shares offered in the company's IPO, which closed on April 2, 2007. On a sequential basis, our non-GAAP fully-diluted EPS increased by $0.05 per share from $0.17 in the first quarter.

Turning to the balance sheet on a sequential basis, cash and cash equivalents and short-term investments were $64.7 million, down $4.7 million from $69.4 million in the prior quarter. The decrease is primarily due to the purchase of a new building, as previously described in our press release on June 28, 2007 for $11.3 million, offset impart by $8.5 million positive cash flow from operating activities during the second quarter. Accounts receivable increased by $5.1 million to $45.8 million and DSOs remained the same at 29 days from Q1 fiscal year '08.

Inventories increased by $19.2 million to $92.7 million, with days in inventory decreasing by two days to 70 days. The increased two days was due to continuing to ramp our revenue. Inventory reserves were $15.1 million, compared to $10.9 million in Q1. The percentage of inventory position was the same between quarters.

Accounts payable increased by $24.5 million to $94.6 million, with the days payable outstanding, increasing 69 days. The increase in days is primarily due to higher inventory levels as described above. Land and building was $38.3 million, representing approximately 352,000 square ft. of property in San Jose, California at the end of Q2.

As previously indicated in the press release and the 8-K filings, the company closed escrow on a building located close to San Jose on October 16, 2007. The building is approximately 9,000 square feet and costs approximately $11.3 million. Historically, we have allocated 70% of the value of the land and 30% to building, which has appreciated over 39 years.

Now for a few comments on our outlook. The total industry has, historically, a period of seasonal revenue weakness in quarters ending September 30th and March 31st, our fiscal Q1 and Q3. However, we have also benefited from revenue traction following the introduction of new products. The company expects the growth trends will continue this quarter and that new products introduced during this period’s prior quarters should offset, in part, the impact of seasonal weakness. As a result, we expect revenue to be in the range of $137 million to $142 million for the third quarter of fiscal year 2008 ending March 31, 2008.

In addition, the company reconfirms the guidance provided on November 14, 2007 regarding fiscal year 2008 revenues and net income. The company continues to expect that as compared to fiscal year 2007, to fiscal year 2008, revenues from server side would grow by about 50%. Total sales will increase by a minimum of 30% and net income will increase by a minimum of 35%.

It is currently expected that the outlook will not be updated until the release of the company's next quarterly earnings announcement. Notwithstanding subsequent development, 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 had a great quarter, with very high revenue and profitability. The broad base of leading-edge products, the outflow and the ability to deliver application optimized solutions, in fact, in an efficient and timely manner to our customers around the world to help them succeed drove these outstanding results.

We continue to drive our sales quarter wise to further optimize our business through innovation and expansion. This quarter our San Clemente chips set space, Xeon, Quad-Core, DDR2 solutions have gone into high volume production, added this with our family of Whisper-Quite high performance workstations, to our already broad and innovative product line. I believe we will have another record-high quarter in revenue.

Thank you all for joining us on our Earnings Call. With that, we will open the call to questions.

Question-and-Answer Session

(Operator Instructions) And we'll go first to Glenn Hanus with Needham. Please go ahead sir.

Glenn Hanus - Needham

Good afternoon. Can you hear me?

Charles Liang

Yes, Glenn.

Glenn Hanus - Needham

Okay. Could you maybe talk a little bit about the offsetting factors of seasonality and the new products. First talk about seasonality or whether you are seeing if that should be more severe than normal or about like normal? And then in terms of the new products, any sort of quantification you can help us with -- how much did new products sort of makeup of your revenues this past quarter and how do you expect that to rollout?

Charles Liang

Okay. Thank you, Charles again. Basically in history, in March quarter we have a seasoning added below our quarter. However this year we had a very strong product line like we just mentioned, our 1U Twin and a high density server have been growing well and we believe this trend will continue for the next couple of quarters at least.

As well as our UIO Universal I/O, which we introduce last March about nine months ago, this product line also continues growing. And again people like the feature we provide. Also, I mean, I just mentioned Intel's Quad-Core [San Clemente] space, Xeon DDR2 that's all of our lower power consumption solution for server and workstation. So we have that product line just in high volume production basically.

However with our Whisper-Quiet, I mean, both times we introduced a very quiet workstation solution for the market -- we call it Whisper-Quiet workstation solutions. So with all of those exceptional products, I believe in our March quarter we should have a record high in revenue again.

Glenn Hanus - Needham

As a follow-up, can you talk about the -- aside from the new products -- can you talk about the level of seasonality, and kind of macro factors you are seeing out there? Are you seeing any scaling back in spending or anything on those lines due to the overall macro environment?

Charles Liang

For example last year, three months ago our March quarter dropped quite a bit from last year, December one year ago. But this year should be different because again our very strong product line, new product line, so I believe like Howard just mentioned, this quarter we could see a 137 to 142. So we should be able to see some gross although maybe not large, because of the traditional seasonality. So Howard you are going to answer.

Howard Hideshima

Glen, like I said to characterize Charles has worked with some numbers in past, last quarter about a year ago we had about $115 million next quarter we had about $105 million. But this quarter we are going from the $137 million we just reported and our range is 137 to 142.

Operator

Our next question goes to Jeffery [Hekaro] at Merrill Lynch. Please go ahead.

Jeffery Hekaro - Merrill Lynch

Hey, Charles. I was wondering if you could talk a little bit more staying on the new products, about the ramp up in the 1U Twin, the UIO, and also, you recently started shipping the SuperBlade product. Wondering if you could give us a little bit more color about how those products are ramping and especially on the 1U Twin, if you talk about any OEM or increased OEM interest?

Charles Liang

Yeah, indeed with the IU Twin, the solution we introduced about three months ago. This product has been growing very successful and a little bit beyond our expectations, so a very nice product. We have a strong confidence that this product now will continue to grow both with new technology, that's new cheapest and new CPU support and new system architecture. So we are growing multiple dimensions with the 1U Twin solution. So in next couple of quarters this product will continue to grow that we strongly believe.

As to UIO, again, also a brand new architecture we just introduced nine months ago. So this product follows 1U Twin. We also have very strong confidence they will continue to grow. As to SuperBlade, because we have lot of customers asking for [Odune] kind of 1U Twin and [Odune] kind of UIO, we have allocated more engineering resource in last six months in 1U Twin, and UIO.

So, SuperBlade continues to grow in as most of these, but the volumes schedule added up to the base. So, we started volume production about four months ago and the quantity is growing mostly not very fast. However we see the booking from customers is getting stronger and stronger.

So for SuperBlade especially optimized, but they have to enter and the one optimized for obviously the environment. I mean [CPDP] right, very quite blade solutions. We have a very strong confidence that the quantity will start to grow quicker, starting from this quarter, maybe a February timeframe, next month.

Jeffery Hekaro - Merrill Lynch

Okay. Then could you just touch on the gross margins clearly getting into the 20% this quarter above saw the 18% to 19% range? Could you talk a little bit about sort of the components within there; in other words, was pricing components down, a majority of it, was that economic to scale? And how should we think about this going forward as you saw a bigger percentage of the revenues on the servers?

Howard Hideshima

Yeah, Jeff, this is Howard. I think you'll see that most of the gross margin indicates three factors the [phenomena] was built by the shift to our server revenue. You see that going up to about 42% and so that shift, as you know, the components have a lower gross margins than our complete service solutions in general, so as a shift to more complete service solutions we gained higher margins.

Charles Liang

Basically, our 1U Twin and UIO as you know is a brand new aspect show so customer we need to pay at even the, they have priced higher priced product performance in future space. And this trend basically is continuing.

Operator

And our next question goes to Josh Sloan with Glacier Bay Capital. Please go ahead.

Josh Sloan - Glacier Bay Capital

Hey, guys really good quarter, we especially like to see the margin expansion there so good job. On the blade product, could you go into that a little bit more? I mean, do you have products now that address all segments of the market, and is there something competitive that’s making it a little slower than you thought, or do you just expected to ramp up over the next several quarters?

Charles Liang

Okay. Yeah, I mean which was shipped aggressively in high volume and it would be earlier. But again, because of the strong interest in 1U Twin and UIO we had to allocate more engineering and power to those products. However, now we’re getting back to the place where we were, again. So enterprise-wise, we had a task sheet about four months ago and office break, I mean the break going at 50:50 very low noise they were and 93% high efficiency basically we have been volume production by next month. So with that product we had lots of interest and some PO from [Cosmo]. Our dada centre optimize [bray] also have been volume production next month, so it is growing?

Josh Sloan - Glacier Bay Capital

How does the size of the blade market compare to sort of where you compete right now? Do you expect that to be a major driver over the next several years?

Charles Liang

Yes I mean for blade server, now where do our market go, above 55% year-over-year, right. So, compared with documents about where do our markets go, only about 5% or 6%. So, pretty much its sales grew much faster the global way. So as chip (inaudible) because the product is new to us, we have 0% revenue coming from blade before and now become a big product line to us. Yes we just started shipping four months ago. So the volume space is kind of small but for long term, let's say next 12 months, 24 months should be very important product line for us in terms of revenue and profitability.

Josh Sloan - Glacier Bay Capital

At one point you guys were talking about building a software server management product, is that still on the table?

Charles Liang

That product line is continuing. So, I believe about this summer or this fall we should have a better sight, better servable customer. So again it's a long-term investment, but we start from a hardware business and then gradually we provide some server management products since two years ago and the product line is growing and it's very important product for us especially for long-term success.

Operator

(Operator Instructions) We're going to go next to Kenneth Miller of Bonanza Capital. Please go ahead.

Kenneth Miller - Bonanza Capital

Afternoon, gentlemen.

Charles Liang

Afternoon.

Kenneth Miller - Bonanza Capital

I wanted to clarify your guidance a little bit. One thing, I don't fully understand, you gave guidance of revenue growth in the release 30% and net income growth in the release 35%. It looks to me like your net income is going 60% year-over-year. And so, can you talk about where you expect operating margins to go directionally, and why the differential between your revenue growth and your net income growth doesn't look greater than 35%?

Howard Hideshima

Yes, Kenny, this is Howard Hideshima. Again, the 35% is on an annual basis. So again, while the quarter-over-quarter is 60%, the annual for what we're giving guidance to is far from 35% minimum, again I stress minimum growth in net income.

Kenneth Miller - Bonanza Capital

But if I'm doing the math quickly here, your year-over-year net income growth was actually more like 56%, so really not far off.

Charles Liang

Yeah. I would rather say basically, we make a conservative presentation to the market.

Kenneth Miller - Bonanza Capital

Well directionally where do you expect your operating margins to go for the rest of the year? Do you expect them to maintain at the net, almost 9% level or it will go down in these four quarters of investments and operating expenses?

Howard Hideshima

I think historically Ken, if you take a look at our percent of operating expenses compared to what we are, we are running fairly consistent historically. And the company over the last couple of years has been very consistent with regards to where its operating expenses have been on a percentage basis of revenue.

Kenneth Miller - Bonanza Capital

So could you comment on what you think operating margins will go in the next couple of quarters or not?

Howard Hideshima

We haven't given guidance within the (inaudible0 segment.

Operator

And we'll go next to [John Ralph. I believe it’s Argon Capital] Please go ahead.

John Ralph - Argon Capital

Hi, guys just a couple of quick questions. One, could you give me again what the CapEx numbers associated with the building purchase are?

Howard Hideshima

Yeah, $11.3 million.

John Ralph - Argon Capital

Okay. That was 11.3. And I noticed as well there is a new long-term liability on balance sheet, what is that?

Howard Hideshima

We had a new accounting probable announced to come out from FIN 48.

John Ralph - Argon Capital

Okay.

Howard Hideshima

It's basically the, that was the shift of the tax payable from payable, down below to accrued liability.

John Ralph - Argon Capital

Okay, I see. And now the last thing, can you tell me what the charge was in this quarter for adjustment of inventory?

Howard Hideshima

1.8%.

John Ralph - Argon Capital

1.8% of revenues.

Howard Hideshima

Right.

John Ralph - Argon Capital

Okay great. Okay thanks very much.

Operator

(Operator Instructions) And it appears at this time that we have no further questions. I would like to turn the call back over to Mr. Liang for any additional or closing comments. Sir.

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 Computer, Incorporated second quarter 2008 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Super Micro Computer F2Q08 (Qtr End 12/31/2007) Earnings Call Transcript
This Transcript
All Transcripts