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Super Micro Computer, Inc. (NASDAQ:SMCI)

Q3 2012 Results Earnings Call

October 23, 2012 5:00 PM ET

Executives

Perry Hayes - Senior Vice President, IR

Charles Liang - Chairman and CEO

Howard Hideshima - Chief Financial Officer

Analysts

Aaron Rakers - Stifel Nicolaus

Mark Kelleher - Dougherty & Company

Amelia Harris – Sterne Agee

Michael Bertz - Kennedy Capital

Brian Freed – Wunderlich Securities

Glenn Hanus - Needham & Company

Robert Maina - CRM LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Inc. First Quarter Fiscal 2013 Conference Call. The company's news release issued earlier today is available from its website at www.supermicro.com. In addition, during today's call the company will refer to a slide presentation that it has made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events & 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, October 23, 2012.

A replay of the call will be accessible until midnight, November 6, by dialing 1-877-870-5176 and entering conference ID number 8555814. 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 first quarter fiscal year 2013, which ended September 30, 2012.

Before I begin, I'd like to advise you of upcoming investor conferences in which Super Micro will be participating. On November 13, we will present at Wunderlich's conference at the supercomputing show in Salt Lake City and on November 15, we will attend the Southwest IDEAS Conference in Dallas where we will present and participate in one-on-one meetings.

By now you should have received a copy of today's news release that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the Events & Presentations tab. Please turn to Slide 2.

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 2012 and our other SEC filings.

All of 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 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 4. First let me provide you with the highlights of our first quarter. Our first quarter revenue was $270.7 million, which is 9.2% higher year-over-year and 1.9% lower quarter-over-quarter. Non-GAAP net income was $3.1 million or 62.4% lower quarter-over-quarter and 70.9% lower compared to last year. Super Micro's non-GAAP earnings per share was $0.07 per diluted share compared to $0.18 last quarter or $0.24 last year.

Slide 5 please. We are pleased that the revenue for quarter was up 7.2% from last year and down only slightly from our record last quarter despite the challenges from a weaker global economy. The demand environment was slower as customer were more cautious about IT spending. While there are IT projects in the [prelim] stage customer are delaying purchasing decisions until they have better visibility into the direction of macro economy.

Given this environment our performance in this quarter indicates that our fundamental business model of offering the most innovative application optimized server and storage solutions remains popular in the market, more importantly it allow us to continue to grow market share.

Last quarter the margin was mainly affected by the significant drop in components pricing of hard disk drive and memory. With the slow economy, the economy and supply imbalance price fail so the market looking to (Inaudible) excess inventory at the lower cost. Although, we delivered near record high quantity of hard drive and memory (Inaudible) with our systems services, they are the key factors that negatively impact our net profit.

We are focusing man power on improving management of both our inventory as well as the component supply to react better to market condition. Let's review our revenue distribution of our business first -- our last quarter. Our server systems contributed 39.5% while 45.3% of our business last quarter came from OEMs and direct customers of which internet data center was 8.8% of sales.

Geographically, revenue in North America was 49.8%, Europe was 23.4% and Asia was 23.9%, which was a record high and 65% growth from that same quarter last year. Our Asia facility have a healthy bump in productivity, reflecting the much higher sales in Asia last quarter.

Whenever it is appropriate from a logistic and service perspective we will leverage as much resource as we can from our Asia facility. Given the global economic conditions, our Asia facility will become even more important in our goal to improve our operational efficiency and cost.

Last quarter's Sandy Bridge sales represent 44% of our Intel based processors, up 84% from the previous quarters, although the ramp of Sandy Bridge based solutions is lower than we anticipated, due in large part to the hold up in the broader economy. Innovative, product such as our GPU products, and MicroCloud moving at higher greater pace. That means our customers continue to look for great technology to go with the new processors.

We do expect that in longer term the market will respond in [volumes] to the benefit our new platforms performance and energy savings advantages. As I have mentioned briefly, our GPU solutions and MicroCloud are the top performers of last quarter, especially for GPU, Super Micro continue to have the most comprehensive GPU product line the industry.

Our recent update include a Kepler K10 GPU support. This single precision calculation optimized solutions are ideal for application in medical, seismic, oil and gas, military and media fields. The upcoming K20 and Xeon-Phi solutions will further extend our leadership in scientific and other HPC computing.

Last but most importantly, our FatTwin product line began formal production successfully at the very end of our September quarter and the demand has been growing strongly. Recently in the head-to-head industry standard benchmark test (Inaudible), our FatTwin outperformed -- beating competitors twin systems in power saving by 16%. This level of power saving and performance will make the FatTwin a strong choice among data centers, cloud infrastructure, HPC environment and Hadoop applications in the coming quarters and years.

Let me now update you with more details on our new and leading technologies. Slide 6 and 7 please. The recently launched FatTwin marks a big new milestone in our five years of twin architecture. It improves systems power savings up to 16% when compared with other similar platforms of major competitors. The 4U FatTwin architecture is available in high-density supporting 8, 4 or 2 hot-pluggable system nodes combinations with a choice of memory capacity, hard disk driver type and basically up to 3 GPU per 1U, AC/DC or battery back-up power modules front or rear I/O networking options and more.

It's a high-efficiency highly effective shared cooling and power supply architecture allowed FatTwin to operate in high ambient temperatures and free air cooling environment up to 47 degrees C, providing huge energy savings and improved TCO, total cost of ownership.

Our GPU optimized product line in 1U, 2U, 3U, 4U [M-blade] performance, provide extreme performance and calculation of our graphic intensive applications, and they have been the most optimized and popular GPU solution in the market. The new X9 generation GPU solutions, designed to support our upcoming new generation GPU, including NVIDIA's Kepler K10, K20 and Intel's Xeon-Phi.

Our new workstation product line featuring new workstation enclosure. With high efficiency, super quite power supply, high performance I/O (Inaudible), special design air cooling sub-systems turbo boost with optional (Inaudible) facility called [HyperSpeed]. This new specialized service and workstation product line support a higher power up to 150 volts (Inaudible) CPU. And it's optimized for HFT, High Frequency Trading, high-performance EDA and oil and gas applications.

Our BBP, battery back-up power module, support brand new data center power supply designs concepts. In modern data centers, it can be used to replace traditional expensive and inefficient UPS in a way of putting high efficiency UPS into its system enclosure. It is an unconventional and yet higher efficiency way of protecting data and investment.

Super Micros data center management, shorter way [SDCM] tools, included in (Inaudible) and open BIOS from (Inaudible) and sort of way updates and monitoring (Inaudible) operated data centers. This is sort of way features and supported capability have been the sales of our hardware, as the solutions to this direct accounts. They have also been supporting our channel partner to be more competitive by providing a complete system management all the way up to their customers.

Finally, our complete rack solution include a high-performance, high-density server, high-capacity storage, high-performance reach and our data centers management all the way up, both designed and supplied by Super Micro. We recently extend our solutions by introducing the Hadoop SuperRack solution for cloud computing and the GPU SuperRack solution for HPC customers. They are actually cost effective for (Inaudible) to scale and among the half is the choice for many enterprise customers. We are expecting that continuing growth of our complete rack solutions business.

In summary, in the first quarter Super Micro achieved healthy sales and gain market share during a weak economic period. Although our margins suffered due to the steep decline in pricing for hard disk driver and memory last quarter, we are working to improve the situation with the strong focus on the designing management of our components business in terms of inventory and cost. We feel that we can return to stronger profitability as our management of components improved and market stability is reached.

For more specifics on the first quarter let me turn it over to Howard Hideshima

Howard Hideshima

Thank you, Charles. And good afternoon, everyone. I will focus my remarks on earnings, gross margins, operating expenses and similar items on a non-GAAP basis which reflect adjustments to exclude stock-compensation spend. 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 first quarter's income statement. Please turn to slide number 8. Revenue was $270.7 million up 9.2% from the same quarter a year ago and down 1.9% sequentially. The increase in revenues from last year was primarily due to subsystems and accessories as well as a ramp of the Sandy Bridge solutions.

The sequential decrease in revenue from last quarter was primarily due to seasonal weakness in the industry concerns about the economy and the transition to Sandy Bridge at the end of the quarter. On a percentage basis MicroCloud and GPU were the fastest growing product lines from the prior quarter. We also saw a good ramp in Sandy Bridge products with an increase of 84% sequentially of Intel based revenue.

Turning to product mix, the portion of revenues from server systems was 39.5% of total revenues, which was comparable to the same quarter a year ago and a decrease from 44.6% last quarter. ASPs for servers was $2,000 per unit which is up from $1,700 last year and the same at $2,000 last quarter. We shipped approximately 55,000 servers in the first quarter and 1,036,000 subsystems and accessories. The decrease in server units resulted in part from some of our data center customers delay and transitioning to Sandy Bridge solutions.

We continue to maintain a diverse revenue base with over 600 customers and none of these customers representing more than 10% of our quarterly revenues. And our data center revenue was 8.8% which was a decrease from 15.2% in the prior quarter.

Furthermore, 49.8% of our revenues came from the U.S. and 54.7% from our distributors and resellers. During the quarter we saw strength in Asia which was offset some weakness in the U.S. while Europe remained about the same on a percentage basis. As we ramp our Taiwan facility and leverage its cost benefits we are confident that we can continue to expand our presence in Asia.

Slide 10 and 11. Non-GAAP gross profit was $35.3 million down 11.5% from $39.8 million in the same quarter last year and down 17.3% from $42.6 million sequentially. On a percentage basis gross margin was 13% down from 16.1% a year ago and from 15.5% sequentially. Price changes from Ablecom resulted in no change to gross profit in the quarter with total purchases representing approximately 20.9% of total cost of goods sold compared to 18% a year ago and 22.6% sequentially.

The year-over-year decrease in gross margin resulted from price changes in hard disk drives and memory in the current quarter when compared to the prior year. September 2011 was right before the October flood in Thailand which cause of all (indiscernible) pricing and supply of hard disk drives over the past year.

Sequentially, gross margin was down almost entirely due to pricing of hard disk drives and memory over 2% of the margin decrease was attributable to hard disk drive and memory pricing. The suppliers reducing cost to acquire hard disk drives and memory which require the cost down of inventory as well as customers reducing their prices to sell their inventory when there is and over supply of these components put pressure on margins.

This month the hard disk drives and memory margins have stabilized and industry reports indicate that vendors are taking actions to stabilize pricing supply but it is early in the quarter and we are tempered our forecast. Our product, our other product margins during the quarter were stable or increased.

Slide 12. Operating expenses were $30.7 million up from $24 million in the same quarter a year ago and comparable to $30.6 million sequentially. As a percentage of revenue, operating expense was 11.3% up from 9.7% a year ago and 11.1% sequentially. Operating expenses were higher on an absolute dollar basis, year-over-year.

We saw a year-over-year increases in absolute dollars primarily in R&D as we invested in headcount to drive our innovation on product portfolio especially in preparation for Romley and FatTwin launches. Sequentially, operating expenses were about the same annual salary increases were offset by reductions in development expenses associated with the launch of Sandy Bridge and our FatTwin last quarter.

Marketing and sale expenses were higher due to write-offs of marketing materials of about $590,000. General and administrative expenses were lower due to lower other and tax expenses associated with our fiscal yearend audits in the prior quarter.

The company's headcount increased by 24 sequentially to 1,527 total employees. Operating profit was $4.6 million or 1.7% of revenues down from $11.3 million or 15.8% a year ago and down $7.4 million from $12 million sequentially. Net income was $3.1 million or 1.1% of revenues, down $7.4 million from $10.5 million a year ago and down $5.1 million from $8.1 million sequentially.

Our non-GAAP fully diluted EPS was $0.07 per share, down from 24% a year ago and down from $0.18 per share sequentially. The number of fully diluted shares used in the first quarter was 44,638,000.

The tax rate in the first quarter on a non-GAAP basis was 31.3% compared to 33.1% a year ago and 31.6% sequentially. We expect the effective tax rate on a non-GAAP basis to be approximately 32% for the December quarter which is comparable to the 30.5% in the same quarter of last year.

Turning to the balance sheet on a sequential basis, slide 13. Cash and cash equivalents and short and long-term investments were $61.3 million, down from $83.3 million in the prior quarter and from $96 million in the same quarter last year. In the first quarter, free cash flow was a negative $27.5 million. The net change in cash was negative $22.5 million for the quarter due to payment of accounts payable associated with the prior increase in inventory.

Slide 14. Accounts receivable increased by $10.8 million to $112.8 million and DSOs was 37 days, an increase of three days from the prior quarter. Inventories decreased by $13.4 million, to $263.2 million with days in inventories increasing by five days to 105 days. The decrease in inventory was due in part to reduction of our HDD, hard disk drive inventory.

Accounts payable decreased by $39.9 million, to $140.1 million, but for the days payables outstanding deceasing by one day to 61 days primarily due to the time of payments to vendors. Overall cash conversion cycle days were 81 days and increase from 9 days from 72 days in the prior quarter.

Now for a few comments on outlook. As indicated previously, during the first quarter, we continue to see the ramp in our Sandy Bridge product line as well as very good interest in our FatTwin products. Asia continues to remain strong for us and we continue to ramp our Taiwan facility. In addition HDD and memories have stabilized a bit but there may be some pressure on our margin should this not continue to hold.

December is typically a seasonally strong quarter for the industry, however we have tampered our guidance today from the slowness at the end of last quarter and the general weakness in the economy, therefore the company currently expects net sales for the quarter ending December 31, 2012 in a range of $270 million to $295 million. Assuming this revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.12 to $0.16 for the quarter. It is currently expected that the outlook will not be updated until the release of the company's next quarterly earnings announcement notwithstanding subsequent developments, however, the company may update the outlook or any portion thereof at any time.

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

Charles Liang

Thank you, Howard. As Super Micro is coming to continues its growth pace even during the economic or slow period. Our competitive position with the industry's best of product especially with FatTwin architecture have never been better. Our Asia facility will continue to be utilized at a greater degree to serve our Asian and European customers while improving our competitiveness in pricing.

We are also committed to increase our profitability through better and more comprehensive customers and technical service, it's [hardware] solutions and components management.

Operator, at this time we are ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we'll go first to Aaron Rakers with Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Thanks for taking the questions. Howard I want to understand a little bit better the discussion on the hard disk drive impact as well as memory impact on the gross margin. Correct me, I think you said two thirds of the gross margin delta in the quarter was attributable to this, is that correct and therefore equating to about 165 basis points or is your guidance assuming with the pricing stabilizing that that comes back into model how are you thinking about gross margin in that context in this current quarter?

**

And therefore equating to about 165 basis points or is your guidance assuming with the pricing stabilizing that, that comes back into the model, how are you thinking about gross margin in that context in this current quarter?

Howard Hideshima

Hi, Aaron, yes. I said in the call that basically – you saw the decrease in margin of about 2.5% between quarters from 15.5% to about 13%. I said about 2% of that or over 2% of that was attributable to the hard disk drives and memory but not two-thirds but 2%.

Aaron Rakers - Stifel Nicolaus

2 percentage points?

Howard Hideshima

Yes.

Aaron Rakers - Stifel Nicolaus

Okay. And your assumption that therefore you're implying that your gross margin this quarter given that that's stabilized now that you've been able to possibly readjust those pricing with your suppliers that you're assuming that we get back to a 15% level in the current quarter?

Howard Hideshima

I have not – I've said that our current month it looks stable right now. So it looks stable. However it's really early in the quarter. Aaron, so we tempered our forecast with some of that. Because again if price decreases happen again and again we're still susceptible to that in our inventories. If price is maintained stable, we're going to be okay and then if prices go up, we may see some benefits. So again it's very early in the quarter. We're seeing stability right now but again it's very early in the quarter.

Aaron Rakers - Stifel Nicolaus

Yeah, I hate to come back to it but stable in your model – would stable mean that, that gross margin impact last quarter comes back to you?

Howard Hideshima

In a way, yes but again we've tempered it in our forecast.

Aaron Rakers - Stifel Nicolaus

Okay and then the follow-up question, just remind us again your situation as far as the hard disk drive supply agreement, where does that stand? I think last quarter it was $223 million. Where does that stand currently? Maybe you can give us some color on how we should think about that in the context of pricing with those suppliers?

Howard Hideshima

Yeah, right now at the end of the quarter, it stands at about $180 million. And there's a two-year agreement that runs through March of 2014.

Aaron Rakers - Stifel Nicolaus

And that – that has some pricing negotiation to it?

Howard Hideshima

Yes, it does.

Aaron Rakers - Stifel Nicolaus

Okay. Thank you.

Operator

And now we'll hear from Mark Kelleher with Dougherty & Company.

Mark Kelleher - Dougherty & Company

Okay, great. Thanks for taking the question. I'm just going to continue right on with that line of thought there. If we take the 2 points and put it back and let's say we didn't have the hard disk drive problem, we'd still be down about 200 basis points from last year. And we had Romleys ramping up. We had a much better utilization of the Taiwan manufacturing facility. I would imagine those two things would be helping. So I'm just trying to figure out where the steady state gross margin number should be? I mean are we now looking at 15%, 16% as the number? And can you still get back to the high-teens where you thought you could get maybe six months ago?

Howard Hideshima

Let me take, Mark. So if we go back to prior to let's say all of those hard disk drive, memory stuff happening, probably about three quarters ago, you will see that we were probably about 16% to 17% as far as the gross margin is concerned. And so in prior quarter – in the June quarter, we said that of that 1.5% decline, majority of that was caused by the hard disk drive and memory and then this quarter I have said that over 2% basically has been caused by the hard disk drive and memory. So you will see a total of around approximately at least 3% caused by hard disk drives and memory over the last couple of quarters, right?

As we work our way through the agreements and improve our vendor relationships and work it, we're hopeful that we can get that back so that – again we can get back to that place where we started off about six months ago, nine months ago back to the 16% to 17%. And then you are right. We do have the other things that should be adding to our gross margins which is the Romley launch coming on board and that's increasing our Taiwan facility utilization and then also obviously increasing our product mix with servers and software and support services. So those things are still working and they're going on. I think we just need to work our way through the hard disk drives and memory.

Mark Kelleher - Dougherty & Company

So there's really 3.5 points that could come back in a stable pricing environment plus the shift back to Romley, the products back to, not necessarily Romley, but the servers, ship back to servers should help that gross margin?

Howard Hideshima

Yeah, certainly that's the impact that we saw coming back from that steady – let's say that state about six months ago.

Mark Kelleher - Dougherty & Company

Is there any thought of having to take a write-down to that inventory?

Howard Hideshima

We've taken our lower costs to our markets to some extent during prior periods. Okay. So we have taken that as the market prices dropped or and the cost is taken. So we have taken some of those write-downs already.

Mark Kelleher - Dougherty & Company

Okay. That's it. Thanks.

Operator

Now we'll go to Sterne Agee's Alex Kurtz.

Amelia Harris – Sterne Agee

Hi, this is Amelia in for Alex today. Thanks for taking the question. Basically given the volatility in your business model, wouldn't it make sense at this point to acquire some system level management software or virtualization software that can potentially, I don't know, buffer to your business model and save you from having to aggressively cut OpEx when you experience maybe a less than favorable quarter?

Charles Liang

Yes, indeed we are aggressively improving our system management software, including a certain demand management, some virtualization and some storage related tool, so including switch, our high performance switch product line. So we are doing those products now.

Amelia Harris – Sterne Agee

And when – I am sorry…

Charles Liang

I'm not acquiring other company, yeah. We still prefer growing organically with our own engineering capability.

Amelia Harris – Sterne Agee

Okay. And when do you expect to maybe see an impact from that?

Charles Liang

The impact have been gradually happening since about two quarters ago. So it won't happen kind of overnight by gradual improvement. For example, today we have more than a handful customers now particularly appreciate our software that we have. And this time we have growth consistently.

Amelia Harris – Sterne Agee

Okay.

Operator

And now we'll go to Michael Bertz with Kennedy Capital.

Michael Bertz - Kennedy Capital

Good afternoon, gentlemen. Just to kind of go back to the gross margin question again, and Howard, maybe you can walk me through a little bit on this and how much the timing impact do you have particularly from hard drive and memory? And I think mainly from hard drives and in that sense, what is the difference between basically passing through the cost if you're selling in those component or something and just how much you guys are having to eat over these different quarters where pricing is moving around? And I mean I understand it's volatile but 350 bps is a significant amount, and it's like – are you buying it in the previous quarter and having to remarket, and you talked about taking some write-downs just because your marketing it at lower cost for market. I mean how much is that impacting? I am assuming most of it is coming in the sub-system business. Is that right, not in the systems business at all?

Howard Hideshima

Well it actually caused in both sides of it, Mike, to the extent that we incorporate the hard disk drives and the memory into our server systems. So any type of price changes and their impact the overall server margin also. So it is not just isolated in the components to sub-system business.

Michael Bertz - Kennedy Capital

So this is – just go back to the timing question then, so what's the cycle time basically? I know I am obviously – can tell what your days inventory is, but what's the cycle times, when you actually buy it to when you actually turn it and put it in a system and sell it, I mean how quickly can that happen internally versus how quickly the price changes externally?

Howard Hideshima

Well the price changes have been happening fairly quickly recently. I mean I think in this previous pricing quarter we actually saw against the strength and then at the end of the quarter we saw a pretty steep drop in the pricing happen per se. I think as some customers were basically trying to get rid of some of their inventory, we saw some pricing pressure at the end of the quarter. So again, it, the timing wise can happen fairly quickly, obviously quicker than when we can turn the inventory.

Michael Bertz - Kennedy Capital

So well then again – not to beat a dead horse so hard, but how quickly can you turn the inventory through your systems, what – again from the time you buy it to the time you ship it and book the revenue? How long is that typically?

Charles Liang

I guess about one month basically. One month but this time is worse because during the hard drive disk shortage, we tried to grow our inventory level. So we grew to about almost six weeks to seven weeks. And that's about the worst case.

Michael Bertz - Kennedy Capital

Okay. So then let's look back to the other part of maybe what's impacting margin and that's mix. So would you characterize the balance of the impact then, Howard, in the last quarter mostly going from mix which kind of tilted unfavourably toward you guys?

Howard Hideshima

Well there is a small portion of this but I do want to make sure that like I said, I have said over 2% of the 2.5% margin impact was due to hard disk drives and memory. Certainly there is some related to mix. I mean we did ship less server systems than we did in the prior quarter.

Michael Bertz - Kennedy Capital

Okay. And then just now go back up to where you've seen the demand come from, I mean and I'm sure some of this is tied, I know you talked a little about the data center being little bit lumpier people waiting and so I get that 40% is a big change quarter to quarter though. As you also look geographically, I mean, U.S. is down 15% and Europe was up a little bit which seems a little bit counterintuitive in a way, Asia I believe being up 34% quarter to quarter, that makes sense. But anything you can attribute to the different shifts you have there both geographically and sort of where end markets of those are coming from?

Charles Liang

Yeah, USA is more competitive in the last two quarters. Especially when we have a hard drive high price appraisal. And another fact I believe because our FatTwin– our FatTwin is really remarkable architecture, and we also experienced some customers they're waiting for that. The good thing is that product line is in production now finally. So that we have our performance in this quarter, December quarter.

Michael Bertz - Kennedy Capital

Okay so Charles just to make sure I'm understanding this right what you're implying is that because you have higher priced systems particularly here in states because of your hard drive problems you were less competitive against maybe Dell or HP is that accurate?

Charles Liang

Basically, yeah.

Michael Bertz - Kennedy Capital

Okay and so you think with the new products here into December we should be in better shape so how would you think then I guess geographically relatively would you assert that the U.S. would be now relatively stronger quarter-to-quarter versus say Europe, you're looking into December, would that be your expectation?

Charles Liang

Because the USA market is more sensitive in technology. Whenever we introduce new architecture USA markets basically responds quicker, that's another factor.

Michael Bertz - Kennedy Capital

Okay, understood. And last question, Howard, you mentioned of almost $600,000 write-off in marketing materials and that was in this quarter?

Howard Hideshima

That's correct.

Michael Bertz - Kennedy Capital

And that seems like a lot, what was that about?

Howard Hideshima

It was more of, just some of our demo and demo type of equipment that we have out there in the field as we're [familiaring] new products and what have you.

Michael Bertz - Kennedy Capital

Okay I'm sorry I took that as to be like papers in this place, sorry. Okay got you.

Howard Hideshima

No Problem.

Michael Bertz - Kennedy Capital

Thanks.

Operator

Moving on, we'll go to Brian Freed with Wunderlich Securites.

Brian Freed – Wunderlich Securities

Good afternoon. Just drilling down a little bit more on Hard disc drives. Can you talk a little bit about what specific steps you are able take to alleviate the impact of future erratic prices, both on hard drives and memory? Are there any ways to one access the long-term pricing contracts, or to increase the frequency of the re-pricing?

And then secondly, could you give us any additional color around the current utilization rate of your new manufacturing facility and how that transition is going?

Charles Liang

Okay I mean for the hard drive inventory question again. Usually we keep us three to four weeks inventory for hard drive and memory but again during the hard drive big shortage timeframe for safety, we'd raise the inventory level to seven weeks so that kind of a clear – a big trouble when price had a big drop and again basically we keep about three-four week's inventory.

As through the facility utilization, I mean Asia facility for sure is a big incremental to us and last quarter we have a 65% growth compared with one year ago, so that dramatically improved our utilization. And today I would like to say we have maybe 30% capacity use, so there has to be a 70% room to grow and we feel very positive for that capacity available.

Brian Freed – Wunderlich Securities

And can you talk about what your targets are in terms of increasing, that utilization of your capacity there?

Charles Liang

Okay I mean again last year we grow about 65% in Asia and next year, I hope we can grow more than 65%. So even we've grown 65% utilization we have reached almost 65% to 70%, so that will be in much better position.

Brian Freed – Wunderlich Securities

Okay and how material do you think that doubling of your utilization could be on your gross margin profile?

Charles Liang

It all depends, if we grow in Asia as Asia margin had to be lower, but if we use those capacity for support customer in Europe then the margin will be slightly better.

Brian Freed – Wunderlich Securities

Okay and then my last follow-up on the hard disc drive inventory, understanding it had gotten up to seven weeks. Are you down three to four weeks at this point of time where you're still somewhere between three and seven weeks?

Charles Liang

I guess about four weeks at this moment.

Brian Freed – Wunderlich Securities

Thank you.

Charles Liang

Thank you.

Operator

(Operator Instructions) And now we'll hear from Glenn Hanus from Needham

Glenn Hanus - Needham & Company

Hi. On Asia, could you just talk a little bit more about the strength over there. Did you have some customer specific rollouts, that – wins that you had or the general strength in the region? Thanks.

Charles Liang

Yeah, I mean since 18 months ago we start to aggressively grow our sales and marketing teams, (Inaudible) teams, so and that's why we grow 65% last year right. So this trend we are continue for sure, and because we already in enabled lots (Inaudible) now those accounts start to buy product.

Glenn Hanus - Needham & Company

Can you comment on your operating expense plans now going forward?

Howard Hideshima

Yeah, Glenn. We're going to obviously continue invest but we're watching it very closely as far as the operating expense I think you don't know that our operating expense were basically flat quarter to quarter, right. And so we'll continue to invest in our R&D but we'll be very prudent with our return on investment going forward.

Glenn Hanus - Needham & Company

Alright, thank you.

Operator

And now we will take follow up from Aaron Rakers from Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Yeah, thanks. A real quick one. The Internet Data Center vertical, just looking at the numbers you were down about 43% sequentially by my math. Can you talk a little bit about what you're seeing in that vertical and I think you alluded to deals pushing out, was that specific to that vertical, and if such, was there any large deals that possibly pushed out in the quarter?

Charles Liang

Yeah, I guess we still assume (Inaudible) is kind of coming back.

Howard Hideshima

And Aaron, before ourselves, yeah, we did push out I mean there were some customers that, as you know, data centers are looking at the latest technologies, so they were evaluating the Sandy Bridge, and so they didn't quite finish their evaluation at the end but we still believe that they're going to be coming in so. Again it's the transition to the new technology, we're seeing that they like our new product, especially the Sandy Bridge, and they just need to get to the testing process.

Glenn Hanus - Needham & Company

Okay. Thank you.

Charles Liang

I would have also say especially that's affecting new architecture.

Operator

And now we'll go to Robert Maina with CRM LLC.

Robert Maina - CRM LLC

Yeah, thank you, for taking my question. I just want to get a quick update – answer, that you said earlier in your presentation, Charles, you said that you were working to improve your inventory and manage the components supply chain better. Can you exactly tell us what processes you're putting in place to make sure that in the future, you do a better job at managing this? Thank you?

Charles Liang

Okay. Basically, in (Inaudible) is kind of almost never happened before a bigger price up and down in our five months time frame so from there we already enhanced our relationship with our hard drive and as well as memory company the relationship, so now we have a much better high level relationship and have some contracts signed. And we today, we've also dedicated a position inside the company now to watch those market change and those vendors policy (Inaudible).

Robert Maina - CRM LLC

Price declines and [ECD] components like you sold this past quarter, does that mean gross margins go lower than the 13% or can you buff it that somehow with some of the new processes you've put in place? Thank you.

Charles Liang

Of course, I'm very happy to say that our hard drive and memory inventory already lowered to much more healthy level, we do have $13 million

Howard Hideshima

$13 million, over $10 million.

Charles Liang

Over $10 million, just in hard drive and memory inventory. So that's for sure dramatically improve our position. And like Howard just said, we now have dedicated position to watch those change periodically. So that to prevent from to minimize that risk.

Robert Maina - CRM LLC

Okay but if I look at the inventory levels still at fairly significant level relative to previous periods how much maybe of the inventory is related to components hard drives and memory. Thank you.

Charles Liang

Like Howard just mentioned hard drive we already reduced $110 million.

Howard Hideshima

Right.

Charles Liang

And overall inventory still high because we expect kind of good revenue this quarter (Inaudible) especially with FatTwin and our special workstation HFT optimizers solution we too need more inventory to prepare for the strong demand this quarter.

Robert Maina - CRM LLC

Okay I'll follow-up off-line. Thank you.

Charles Liang

Thank you.

Operator

And that does conclude the question and answer session of our conference call and I would like to turn the conference back over to Mr. Liang for any closing remarks.

Charles Liang

Thank you for joining us today and we look forward to talking to you again at the end of this quarter. Thank you, everyone. Have a great day.

Operator

Thank you ladies and Gentleman let us conclude the Super Micro first quarter fiscal year 2013 conference call. We do appreciate your participation, you may now disconnect. Thank you.

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