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Super Micro Computer, Inc. (NASDAQ:SMCI)

F4Q12 Earnings Call

August 07, 2012 05:00 pm ET

Executives

Perry Hayes - SVP, IR

Charles Liang - Chairman & CEO

Howard Hideshima - CFO

Analysts

Mark Kelleher - Dougherty & Company

Rajesh Ghai - ThinkEquity

Glenn Hanus - Needham & Company

Aaron Rakers - Stifel Nicolaus

Andrew Storm - Cortina

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Super Micro Computer Inc. fourth quarter and full fiscal 2012 conference call. The company’s news release issued earlier today is available from its website at www.supermicro.com. In addition, during today’s call, the company will refer to a slide presentation that it has made available to participants which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the investor relations sections under the events and 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, August 7, 2012. A replay of the call will be accessible until midnight, August 21, by dialing 1-877-870-5176 and entering conference ID number 4481991. International callers should dial 1-858-384-5517.

With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer and Perry Hayes, Senior Vice President, Investor relations.

And now, I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Perry Hayes

Good afternoon and thank you for attending Super Micro’s conference call on financial results for the fourth quarter and full fiscal year 2012, which ended June 30, 2012.

Before I begin, I’d like to advise you of upcoming investor conferences in which Super Micro will be participating. On August 28, we will attend the Midwest IDEAS conference in Chicago and on and on September 12, we will attend the ThinkEquity’s Annual Growth Conference in New York, where we will present and participate in one-on-one meetings.

By now, you should have received a copy of today’s news release that was distributed at the close of regular trading and is available on 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 2. Before we start, I will 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 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 first quarter. We’re pleased that our first quarter revenue was $275.9 million or 14.9% higher quarter-over-quarter and 6% higher year-over-year. This result is a record high for Super Micro. Non-GAAP net income was $8.1 million or 7.9% lower quarter-over-quarter and 37.5% lower compared to last year.

Super Micro’s non-GAAP earnings per share was $0.18 per diluted share compared to $0.19 last quarter or $0.29 last year.

Slide five please. Let me start with our results last quarter as well as our achievement and challenges in the last fiscal year. I will then provide some insights on our plans for upcoming year. Last quarter we achieved record high revenue that sum up to over $1 billion revenue for our fiscal year. We are especially pleased with the strong performance of our complete rack solutions which has grown rapidly over the last year at almost 300% growth quarter-over-quarter.

This rack of solutions combined with our server systems contributed to 44.6% of our total revenue last quarter. Furthermore 46.6% of our business last quarter came from OEM and direct customers and especially internet data center which were 15.2% of sales.

Geographically, our revenue in North America was 57.4% and stronger than last quarter while Europe was 22.4% and Asia was 17.5% slightly lower from last quarter. Despite the weak global economic conditions that had impacted the rate of our growth, our business have been able to grow overall.

Our margins (inaudible) last quarter mainly due to the drop in hard driver price as well as some price drop also happened to our memory team component. However we believe that most of the impact to our margin occurred last quarter and the supply and demand conditions are in process of stabilizing.

For the full fiscal year we are pleased with our top line performance especially our global operation from Beijing instrument, regardless of a challenging period of hard driver shortage, a later than expected technology transition and a weaker global economy.

Last year we grew full-year revenue by 7.6% year-over-year which once again outgrew the rest of other IT market. It indicated that we continue to take much share because of our strong product line and our time to market advantage. Some key products other than rack solutions mentioned previously experienced good growth as well, highlighting growth in the storage solutions and Blade in particular.

The storage solution business grew 25% year-over-year which was a good result considering the hard driver shortage. The SuperBlade products grew 30% year-over-year. We are also receiving great traction and quickly ramping up the MicroCloud Solutions this year as most of the customers are looking for great scalable cloud solutions for their business.

On the business operations, we have opened our Asia Science and Technology Park in Taiwan in January this year and it had been growing steadily. Our Taiwan facility has now reached 300 employees in production, operations, engineering, sales and administration. With this level of staffing we are well positioned to both grow our business internationally and to fully support operations here in the United States. At this stage we’re overcoming the challenges that come with global operation and logistics which (inaudible) and underutilized capacity in the near term.

However, we’re continuing to build our capability and expect to see contributions to our profitability from Taiwan in the near future.

Last year, we grew our headcount about 19% with significant portion of that growth for Asia facility. Approximately half of our total headcount goes basically in our engineering as we further excel in hardware and developing software, maintaining our time to market advantage in the (inaudible) and the launch of our Sandy Bridge product lines as well as our in the (inaudible) of our as well as our (inaudible) innovation. The FatTwin require that we invest more in engineering resource last year.

We're excited about our upcoming fiscal year 2013 with Sandy Bridge processor finally in production volume at the end of last year. We are still at the beginning of the upgrading cycle. Last quarter, we saw less than 10% of our total revenue on the Sandy Bridge base the DPX9 products.

Currently all of our product lines have been updated and enhanced for the Sandy Bridge technology. As the server upgrade cycle ramps over the next several quarters, we are very well positioned with the best server solutions in the industry.

I will now turn to slide six. In addition, we have recently introduced our Fat Twin Architecture; we fully expect them to be our important growth factor in the coming years. Now Fat Twin is a highly optimal for whole new Twin architecture that is optimized for data center, cloud infrastructure, Edge PC environment and storage (inaudible).

The Fat Twin was the best for storage capacity with eight (inaudible) external separable hard driver for one new space, it also delivers the high performance per watt and highest performance per dollars because of our superior architecture design that's (inaudible) power requirement minimum power distribution (inaudible) high efficiency model of design (inaudible) digital power supply and easy our service and maintenance. It allows free air cooling wise supporting 130 watt CPU at a 47 degree C MPN environment and 135 watt CPU at a 35 degree C which is embedded in the industry. We believe that Fat Twin is a unique architecture in the industry that that had potential to be a game changing product line for Super Micro for many years to come.

Our agenda Fat Twin let me now update you with more details on our new and beating technologies. Slide seven NA please. Super Micro's X9 Sandy Bridge solutions for different market segments feature the new generation high efficiency digital power supply that can be to 95% efficiency in typical applications, combined with our battery backup power module, exclusive to Super Micro Data centers can now eliminate the need for a traditional package UPS system, we are providing a mission critical availability. Optimized for capillary in media capillary GPU and upcoming Intel G5 our GPU optimize the product nine in 1U, 2U, 3U and 4U and prepaid firms provide extreme performance in SPC calculation, medical, forensic and work of intensive applications.

Our optimized for professional users, our new work station product nine Maximus 35 and featured super quite power supply and high performance (inaudible). Specialties nine (inaudible) top system, couple (inaudible) an enterprise over packing capability. We are also continuing expand our offering of optimized 10G infiniband (inaudible) and FCOE solutions to our cloud and data center customers. Our switch products in medium provisions in performance and costs. Super Mario's data center management software tool SDCM, SSM, and (inaudible) firmware update MFU utilities will help us present a total solution to our customers.

Our next slide have converted to flow users and that we had just begin to recognize revenue on sales of those software. We believe this is only the beginning of our ability to provide a both hardware and software solutions to our customers. Our complete (inaudible) solutions have been successfully deployed to many data centers interest. With our increasing engineering expertise and extensive testing that direct shipment of computer rack provided the customers instantaneously of how power own convenience and trouble free experience. We are expecting a faster gross of our complete solution.

In summary, in fiscal year 2012, Super Micro again outgrew the industry during a challenging period. We are pleased that we had a reached a milestone of $1 billion company and we are also pleased to be prove for a 19 year, we had continued our chain of strong gross and profitability.

As we ended fiscal 2013, we’re positioned better than ever to grow rapidly. With a strong global presence and a production capacity combined with our inter (inaudible) X9 platform, including server, networking, storage and complete rack solutions. We’re prepared not only to meet the customer demand from the IT upgrade cycle but also to gain more much share from competitors. For more specifics on the fourth 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 and in the supplemental detail in the slide presentation accompanying this conference call.

Let me begin with a review of the fourth quarter income statement. Please turn to slide nine. Revenue was $275.9 million up 6% from same quarter a year ago and up 14.9% sequentially. The increase in revenue from last year was primarily due to the growth in our server solutions business from the continuing ramp of our full rack solutions and new product platform MicroCloud. The sequential increase in revenue from last quarter was primarily due to sub systems and accessory sales primarily of hard disk drives and memory as discussed previously and the ramp of our four rack solutions. On a percentage basis four rack solutions MicroCloud and storage were the fastest growing top lines from the prior quarter.

Slide 10. Turning to product mix, the portion revenues from server systems was 44.6% which was an increase from 40.4% a year ago and a decrease from 48.5% last quarter. ASPs for servers were $2,000 per unit which is up from $1,800 per unit last year and the same at $2,000 last quarter. We shipped approximately 62,000 servers in the fourth quarter and 1,167,000 subsystems and accessories.

We continue to maintain a diverse revenue base with over 600 customers with none of these customers representing more than 10% of our quarterly revenue and our data center revenue 15.2% which was a decrease from 15.7% in the prior quarter.

Furthermore, 57.4% of our revenues came from the US and 53.4% from our distributors and resellers.

Slide 11 and 12. Non-GAAP gross profit was $42.6 million up 5.4% from $40.5 million in the same quarter last year and up 4.2% from $40.9 million sequentially. On a percentage basis gross margin was 15.5% the same as 15.5% a year ago and down from 17% sequentially. Price changes from Ablecom resulted in no change to gross profit in the quarter and total purchases represented approximately 22.6% of total cost of goods sold compared to 14.9% a year ago and 20% sequentially.

Our year-over-year gross margin was the same both quarters were impacted by challenging component pricing, last year for memory pricing due to the Japan and earthquake and tsunami and this year from hard disk drive, the memories due to the Thailand flood and product transition. As a result of these events the company has improved its relationship with its vendors and this should help the company in the future.

Subsequently, sequentially gross margins decreased from last quarter primarily due to hard disk drives and memory price we mentioned above. Margins for other products were about the same as the prior quarter.

Slide 13. Operating expenses were $30.6 million up from $22.7 million in the same quarter a year ago and up from $28.7 million sequentially. As a percentage of revenue, operating expenses was 11.1% up from 8.7% last year and down from 11.9% 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 invested in our portfolio for the Sandy Bridge as well as Fat Twin and other new product platforms.

Sequentially, we saw an increase in operating expenses of about $1.9 million primarily due to sales and marketing expenses of about $1.2 million, associated with promotional expenses for new products and trade show expenses. In addition, G&A expenses increased by about $452,000 primarily due to foreign exchange losses on sales.

The company's headcount increased by 50 primarily in operations and in R&D to 1,503 total employees. Operating profit was $12 million or 4.4% of revenue down by $5.7 million or 32.2% from the $17.7 million a year ago and down $0.2 million or 1.4% from $12.2 million sequentially.

Net income was $8.1 million or 2.9% of revenue, down $4.9 million or 37.5% from $13 million a year ago and down $0.7 million or 7.9% from $8.8 million sequentially.

Our non-GAAP fully diluted EPS was $0.18 per share, down $0.11 from $0.29 per share a year ago and down $0.01 from $0.19 per share sequentially. The number of fully diluted shares used in the fourth quarter was 45,548,000.

The tax rate in the fourth quarter on a non-GAAP basis was 31.6% compared to 26% a year ago and 26.6% sequentially. The increase in the tax rate from the prior year was primarily due to timing of the R&D credit. We expect the effective tax rate on a non-GAAP basis to be approximately 34% for the September quarter which is higher than the 33.1% in the same quarter last year since the R&D credit has not been reinstated yet this year. If the R&D credit is reinstated retroactively as has been done in the past then there will be a catch-up of the credit in the quarter this occurs.

Turning to the balance sheet on a sequential basis on slide 14. Cash and cash equivalents and short and long-term investments were at $83.8 million, down $8.4 million from $92.2 million in the prior quarter and up $8.6 million from $75.2 million in the second quarter last year. In the fourth quarter, free cash flow was a negative $5.5 million. The negative cash flow is primarily due to increase in inventory.

Slide 15. Accounts receivable increased by $1 million, or a $102 million and DSOs were 34 days, a decrease of one day from the prior quarter. Inventories increased by $47.7 million, to $276.6 million with days in inventory increasing by three days to a 100 days. The increase in inventory was due in part to preparing for the increase in demand following the Sandy Bridge launch and repricing hard disk drive inventory level.

Accounts payable increased by $31.8 million, to a $174 million, with the days payables outstanding increasing by two days to 62 days primarily due to the increase in inventory as mentioned above. Overall cash conversion days were both 72 days for the fourth quarter and the prior quarter. The overall ratio as noted above were higher than historical due to the replenishing of hard disk drive inventory levels and the ramping of the Sandy Bridge product line.

Now for a few comments on outlook. As indicated previously, during the fourth quarter, we continue to grow our Sandy Bridge solutions in which we have a time to market advantage. Our four rack solutions are ramping and we have launched our Fat Twin solution. We remain cautious about the global economic environment, but do see opportunities for growth around the world. Our Taiwan facility is still ramping and we continue to see operational efficiencies we can gain.

So as we enter September quarter, which is a seasonally weak quarter for the industry, we expect to see continuing ramp of the Sandy Bridge product lines, higher volumes of our Fat Twin solution as well as improvement in our operations overseas. We enter fiscal year ‘13 in a strong position from a product and operating perspective to benefit from investments we have made over the past year.

Therefore the company currently expects net sales for the quarter ending September 30, 2012 in a range of $270 million to $290 million. Assuming this revenue range the company expects non-GAAP earnings per diluted share of approximately $0.18 to $0.24 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 back to Charles for some closing remarks.

Charles Liang

Thank you, Howard. While we are pleased that 2012 was another year of success and growth for Super Micro. We now look forward to a stronger fiscal 2013 with the Asia and EMEA facility ramping in production and the growth drive such as the new Fat Twin architecture, the industry’ industry's product nine of Sandy Bridge products, storage, GPU solutions, complete rack solutions, data center software and etcetera. We had never been better positioned to grow our business. In summary, we believe our competitive position and strong brands we’ll deliver good result in 2013 and we expect this result to provide better profitability.

Operator at this time we are ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen our question and answer session will be conducted electronically. (Operator Instructions) We will take our first question from Mark Kelleher with Dougherty & Company.

Mark Kelleher - Dougherty & Company

I was wondering if, I know you guys talked a lot about the pricing effect, the component pricing on gross margin, could you just talk a little bit more about the revenue shortfall to your initial guidance, was there, what came in a little unusual, is it just general economic weakness, was it Europe, was it a slower ramp in Sandy Bridge servers, can you just talk about that a little bit?

Charles Liang

Yeah, very good question. I guess the hard drive price drop and also (inaudible) to operate that can be a little conservative to gain some lower margin business and that's another reason. And also Sandy Bridge this time ramped up a little bit so that kind of lower our revenue in June quarter, however the September quarter should be much better.

Mark Kelleher - Dougherty & Company

So was Europe having any effect, how’s your exposure doing?

Howard Hideshima

Europe was okay. Mark it was down a bit, but obviously we’re still seeing a lot of opportunities over there.

Mark Kelleher - Dougherty & Company

And then just as a follow-up, the gross margin plan that you have. Can you just talk a little bit about where that should trend. I know you have given in the past some longer-term goals. Are you sticking to those goals?

Howard Hideshima

Yes we are. I mean the opportunities for the Taiwan facility and the other things that we’re doing still are out there. I think if I had to characterize this quarter, as Charles and I previously mentioned on the memory and hard disk drive, you see, that was the majority of the shortfall between lets say the March quarter margin and June margins.

Operator

And we will move next to Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity

Howard, memory pricing has kind of reached the bottom it looks like and very likely to go up in the future; if one has to have a guess up. What steps are you taking to ensure that you know, this increase in memory pricing does not impact the gross margin going forward and you know, actually they have the advantage because it does happen in that direction?

Howard Hideshima

Yeah, in earlier kind of April-May timeframe, the expect that module price will grow and of which based at that time and that’s why we suffered EBITDA as well. But now I rather say that the time should be passed already. So the price for hard drive and module are now much more stable now, so I believe our (inaudible) will become more heavy.

Rajesh Ghai - ThinkEquity

If memory pricing goes up in the future, like it reflects to happen, can we expect gross margin stability or could that be again a headwind for you in the future?

Charles Liang

I guess once the price is more stable, then it is better for us, but again during the hard driver shortage timeframe, we spend a lot of effort to enhance that relationship with our partner. So indeed whole company is in much better position than before.

Rajesh Ghai - ThinkEquity

Okay. And can you comment on the competitive landscape and pricing in North America if that was any reason for the gross margin weakness. We are hearing reports of the Taiwanese contract manufacturers getting more active in North America may be selling directly to some of your customers. Can you provide some color on that?

Howard Hideshima

As I mentioned earlier, the gross margin move that you saw between the quarters was -- I guess majority of it was the hard disk memory pricing. Actually the pricing or the margins for our other products was fairly stable between the quarters. So we didn’t see that impact that you may be talking about.

Rajesh Ghai - ThinkEquity

But have you seen your competitive landscape kind of change over the past one year compared to what you may have seen – when the Nehalem refresh first occurred?

Howard Hideshima

Well certainly the Nehalem refresh was coming off the eve of that economic time that we are going through back end 2009. This time around it’s not quite -- the economy is still a concern out there, but certainly not at the same level it was back in 2009. So again there is lots of good opportunities out there for us even though you had that economy kind of backdrop. It’s not as bad as it was back in 2009.

Rajesh Ghai - ThinkEquity

But no comparative concerns?

Howard Hideshima

Well I think back in 2009 I think there was a lot of shrinkage in the market at that point because of the tough economic conditions there that you saw a very competitive market. I don’t think you see that as much this time around.

Operator

We will move next to Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company

So just to make sure I understood the answer to the first question there about the roughly $20 million in shortfall on the quarter, did you say that the Sandy Bridge rollout was a little slower generally than anticipated. Was that the reason, the primary reason for the revenue shortfall?

Howard Hideshima

That is one of the main reasons, other than the hard driver price drop and [dim] price that could give us more pleasure to gain those best margin deals.

Glen Hanus - Needham & Company

I am sorry what does the drive issue has to do with the revenue shortfall.

Charles Liang

I mean the driver price drop, our margin from hard driver for memory become much lower. That's why we are a bit reluctant to approaching those low margin market (inaudible).

Glen Hanus - Needham & Company

Okay. And just kind of geographically can you talk about Europe versus America versus Asia, the kind of that current demand environment what you saw in the quarter and the current demand environment by geography?

Charles Liang

You know in USA our kind of revenue share continue to be strong. In Europe we start to be very aggressive to grow sales and marketing team in last six months. So we did a higher minimal sales and marketing guidance in Europe. Same thing in Asia, so we believe mostly in Europe and Asia, our revenues should grow strongly in 2013.

Glen Hanus - Needham & Company

I didn't quite understand the comment. I thought I heard in the narrative on under utilized capacity, what was that?

Charles Liang

You know in Taiwan we have a big facility. The production capacity almost as big as our facility in USA. However, the shipping from Taiwan is very small. That’s why we do not will utilize the capacity in Taiwan. And that’s why income scale has stayed very weak in Taiwan. We need to impact higher volume.

Glenn Hanus - Needham & Company

And on the model goals of roughly 19% gross margin, 9% operating margin, I think you use to say, you know, the goal was like the second half of fiscal '13. Has that pushed out at all as your goal just given the economic challenges or do you think that’s still a realistic timeframe?

Charles Liang

I guess we had to push our may be too much but in quarter.

Glenn Hanus - Needham & Company

Okay, sorry were you going to comment Howard?

Howard Hideshima

Hello Glen, I think I mentioned earlier the levers are still there. I think we have to address the economic challenges but I think the levers are still there as we talked about before.

Glenn Hanus - Needham & Company

Okay, lastly from me. Operating expenses have been running a little higher than we had modeled recently. Can you talk about what happened to make you want like you wanted to ramp up some expenses more? It sounds like more on the sales and marketing side but across a little bit R&D and how we should think about that going forward?

Charles Liang

Let me stop. I mean I guess because challenge strong competition. That’s why we have spend a more effort in technology For FatTwin is become a very big strong product. We invested a lot on this premium architecture and that created a more expense ratio for June quarter. The other area is because we start to emphasis a lot in Europe and Asia that’s why we haven’t spend all more money in promotion especially Europe and Asia.

.

Operator

(Operator Instructions) And we will move next to Aaron Rakers with Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Okay, perfect. So a couple of questions if I can as well and I apologize if some of these were asked already but the Romley cycle or the Sandy Bridge cycle for you guys can you give us any color of where we are at in that cycle are we for you guys is 20% of your shipments on those new platforms, how we think about the progression and ultimately we want to go is how do we think about that in the context of what looks to be a relatively stable ASP trend on a sequential basis this last quarter?

Charles Liang

Yeah when new product available this year, we were better ASP and better margin, however this time kind of Sandy Bridge because of more technical challenge and also we tried to provide indeed we provide brand new architecture Fat Twin or those made the come to market a little bit better but the product however become much stronger and we expect those (inaudible) should be probably little strong in September quarter and December quarter.

Aaron Rakers - Stifel Nicolaus

Okay. So I am clear so on a like-to-like basis Romley is neutral to the gross margin right now relative to the Nehalem platforms additive or I am just a little bit confused by that.

Howard Hideshima

Aaron this is Howard I think Charles mentioned earlier in his presentation so the revenues are still less than 10% of our overall revenues, so we are still at the very beginning of the ramp and it is additive to our gross margins.

Aaron Rakers - Stifel Nicolaus

And then the follow up question from me, I believe in your 10-Q you guys this quarter $276 million of hard disk drive purchase commitment that carried through, I think it was March of 2014, I guess I want to go back to the hard disk drive discussion understanding that and seeing what’s happening in the pricing environment, I guess is that to be a lingering overhang over the next couple of quarters given how that LTA if you will kind of plays itself out or is that something that you can or does that basically lift you over the coming quarters. Just trying to understand how that LTA kind of forced you model that $276 million number you guys disclosed?

Howard Hideshima

This is Howard. Like I said the LTA model again it doesn’t cover a 100% of our demand, so there is some buffer out there. For us we do take shipments every quarter based upon it and we do work on pricing with our vendors every quarter on it. So it’s adjusted every quarter with us, we do work with them and it is built in and I think it is a good thing for the long-term for us; I mean we have been growing things with it, but we do I think it is a good thing because as Charles mentioned we are building our relationships with these guys, increasing our importance, so it will support us as we grow our scale going forward.

Operator

And we will move next to Andrew Storm with Cortina.

Andrew Storm - Cortina

Just wanted to make sure I understood a couple of things. On the OpEx expenses you talked about, you said you are running higher promotions and then you also said you will spend more on R&D for the Fat Twin; is there any one time spending for R&D with the materials and that’s going come out next quarter or promotions or as we think about this new OpEx level as the base rate going forward?

Charles Liang

Yes for factoring in its pretty much one time.

Andrew Storm - Cortina

And so how much was that?

Charles Liang

I believe we already spend maybe $7 million to $8 million kind of extra money to build the strong product line. So in next few quarters we will continue to make the (inaudible) stronger, but relatively the investment will be much smaller.

Andrew Storm - Cortina

So it’s a couple of million R&D coming out next quarter?

Charles Liang

Next few quarters.

Andrew Storm - Cortina

Okay. And then also for promotions?

Charles Liang

Promotion I believe we already done a lot. So the next few quarters should be much less.

Andrew Storm - Cortina

Okay, so you said that on sales and marketing it was $1.2 million so that should come down some by let's say $0.5 million or closer to $1 million?

Howard Hideshima

We had a trade show out there so again it will come down from the trade show perspective; but we've got other things that will offset some of that like, salary increases at an annual basis. And if you look back, probably back last year, you will see a similar type of growth although maybe not as high in our op expenses due to the salary adjustments.

Andrew Storm - Cortina

And then on gross margins and going to Aaron’s point, should we start to see with the hard disks is this more of a one quarter issue or does the LTA make it that this is a kind of rolling initiative slowly gets better?

Charles Liang

I would have to say for hard drive impact and also the quarter should be March quarter and June quarter and then we are in better position now.

Andrew Storm - Cortina

I understand but since hard disk drive has gone down and you've entered into a long term purchasing agreement. You didn't fully answered me, you said that you guys work with your suppliers on pricing but should that pricing that you get come down in this quarter, to be more commensurate at the market, or will continue to be a drag?

Charles Liang

Yeah, indeed the price that we have agreed with our vendors is pretty flexible so we should be able to gather properly adjustment.

Andrew Storm - Cortina

Okay, so there shouldn’t be a gross margin surprise next quarter?

Charles Liang

Should be much better than (inaudible).

Andrew Storm - Cortina

And then just to make sure I understood, you said you basically walked away from some lower margin business because of the hard disk drive issue this quarter. Is that right?

Charles Liang

Yes, a little bit.

Andrew Storm - Cortina

Okay, and was there any large deals that might have slipped or switched out?

Howard Hideshima

Yeah, there is one deal that we’ve been working on that we had, we thought we were going to recognize this quarter that has slipped out.

Andrew Storm - Cortina

And last thing if I could ask is, with the rolling cycle, you are 10% now. So when does that really pick up, I mean is this something that we should be talking about for you guys three or six months out; I mean, when does it really start to dominate the financials?

Charles Liang

I believe that it have been within next six months for sure.

Operator

And at this time, we have no further questions in our queue. I would like to turn the call back over to Mr. Liang for any additional or closing comments.

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 and have a great day.

Operator

Thank you ladies and gentlemen. That does conclude the Super Micro fourth quarter fiscal year 2012 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.

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