Super Micro Computer, Inc.

Super Micro Computer, Inc.

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Super Micro Computer, Inc. (SMCI) Q2 2016 Earnings Call Transcript

Published at 2016-01-28 23:13:06
Executives
Perry G. Hayes - Senior Vice President-Investor Relations Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board Howard Hideshima - Chief Financial Officer
Analysts
Joseph Quatrochi - Stifel, Nicolaus & Co., Inc. Mark D. Kelleher - D.A. Davidson & Co. Matthew Walter Dhane - Tieton Capital Management LLC Kimberly C. Donovan - Needham & Co. LLC Nehal Sushil Chokshi - Maxim Group LLC Alex Kurtz - Sterne Agee CRT
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer Incorporated Second Quarter Fiscal 2016 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 the slide presentation that is 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 parties 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 Thursday, January 28, 2016. A replay of the call will be accessible until midnight, Friday, February 11, by dialing 1-877-870-5176 and entering conference ID number 3488698. 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. I would now like to turn the conference over to Mr. Hayes. Please go ahead, sir. Perry G. Hayes - Senior Vice President-Investor Relations: Good afternoon and thank you for attending Super Micro's conference call on financial results for the second quarter fiscal year 2016, which ended December 31, 2015. 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 event and presentations tab. Please turn to slide two. Before we start, I'll remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2015, and our other SEC filings. All of those documents are available from the Investor Relations page of Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide three of this presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer. Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Thank you, Perry, and good afternoon, everyone. Please turn to slide four. First, let me provide you with the highlights of our fiscal second quarter. Second quarter revenue was $639 million, another record high for Super Micro. It's 23% higher quarter-over-quarter and 27% higher year-over-year. Super Micro is a long-term, very high growth company. We have grown five times since Q1 2009. We are on target for meeting our fiscal 2016 revenue and growth rate projection of greater than 20%. Our calendar quarter is above target, as well as our year-to-date fiscal first half performance. Non-GAAP net income was $38 million and was 13.4% higher, compared to last year. Super Micro's non-GAAP earnings per share was $0.73 per diluted share, compared to $0.32 last quarter, or $0.65 last year. In the seasonally strong second quarter, our growth rate was more than four times the industry's average, and we continue to strongly increase market share. Our growth was mainly driven by our Complete System Solutions, which account for 71% of our total revenue in the quarter. We also saw growth across our strategic verticals, with the cloud and Internet data center representing 30% of total revenue. Storage solutions, again, showed strong growth, up 58% from last year and now accounts for 21% of total revenue. These high-growth segments have contributed to our strong business growth. We have been securing new design-wins with superior first-to-market technology and application optimization. They are keys to our winning strategy for our Completed Systems and Solutions. A couple of strong examples of growing partnerships in this quarter include a Fortune 50 company that started to shift new private cloud and storage appliance with our high-storage density and NVMe supported twin architectures. Another Tier 1, also a new big customer, kind of big data Internet company who just scale from development to a hybrid (6:13) using the 4U (6:18), our FatTwin that delivers the (6:20) power efficiency, computing density and performance (6:26). These are truly win-win scenarios. Our product portfolio provides our customers incredible flexibility. Our first go-to-market innovation enables them to deliver the most optimized solution, and our expanding enterprise capabilities provided them the global support and serviceability they require. Slide four, please – slide five, please. The strong growth of our storage business has been driven by the rapid market adoption of software-defined storage. We should update this storage hardware portfolio in the industry. A large number of storage appliance vendors rely on Super Micro to build their (7:17) storage platforms. Revenue from our storage appliance partners was a significant contributor in our overall storage growth. On the product and technology side, we are an industry leader in hybrid and all-flash NVMe storage systems, empowering software-defined storage solutions that dramatically outperforms our legacy proprietary storage technology. We introduced our Simply Double Storage architecture with an industry-first to you hot-swappable four tier (7:51) base system. We patent the second level of tier of storage which delivers up to (8:03) capacity of comparative systems. We has seen strong demand for our new 3U MicroBlade with its high-computing density, supporting up to 8 Xeon processors per 1U. The compute is combined with an impressive storage capacity for traditional Datacenter and also a greater choice for all-flash hybrid storage applications. Betting on the strong success of our 4U 90-bay Storage TwinPro we are expanding the product line with 90-Bay and 60-Bay storage service systems and more. The revenue on the (8:53) and Datacenter optimize, TCO recommends several products grew more than 50% year-over-year. Customers like our extremely high memory and storage capacity and I/O expandability, while offering the lowest TCO via high power efficient system design. With the coming months of new Intel GM processor, code name Broadwell we are expecting continued strong growth on the (9:28) and TCO products as many datacenter will upgrade to the faster and more efficient technology. Continuing to deliver on our first to market strategy we are already providing many Broadwell based products to customers, seeking early development and testing. Our software portfolio in global service grew relatively new and starting from a small base. Continue to be our fastest growing high-margin product line. The software and service products are key to the success of our overall solution, sales strategy and critical contributor to our long-term margin growth. Over the last year, we doubled our Super Server Manager, or SSM software user base and more than doubled our software and service revenue. These numbers will now only continue to grow as we continue to promote and expand our SSM features. On our global service, we are continuing to invest in our service capability, capacity and expanding fleet application engineering to support our growth in the enterprise market. Slide six please, Geographically, North America was 63.7% revenue and was up 41.9% year-over-year. Europe was 17.9% of total revenue and up 24.6% year-over-year. In Asia, revenues were 13.8% of total revenue and up 3.5% year-over-year. We have seen that our strategy of focusing on North America and Europe is paying dividends in term of overall revenue growth and better profitability. We are continuing the effort of global expansion as we complete new construction bases of our green computing parts in Silicon Valley. And doubled our production facilities in Europe. Latin America increased our manufacturing scale to service our customer worldwide. In summary, Super Micro had, again, set a record high quarter for revenue and earnings. We are in the strongest position that has ever been. And we are growing multiple times faster than the overall industry. Now, we are extremely focused on executing our strengths in technology and leveraging our global foundation. We believe heading to 2016 will be a very strong year for Super Micro. For more specific on the December quarter, let me turn it over to Howard. Howard Hideshima - Chief Financial Officer: 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 reflects adjustments to exclude stock compensation expenses. Reconciliation of GAAP to non-GAAP is included in the financial statements of the company in today's earnings release and in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with the review of the second quarter income statement. Please turn to slide seven. Revenue was a record $639 million, up 27% from the same quarter a year ago, and up 23% sequentially. The increase in revenues from last year was primarily due to our increase in Server Solutions, which was up 50.1% led by our growth in cloud datacenter of 86.3% and storage of 58.4% year-over-year. On a geographic basis, we had strong growth in the U.S., up 41.9%, as well as growth in parts of Europe and Asia. Our Services and Software revenue have grown by over 100%. The sequential increase in revenues was primarily due to our continued execution of our business model and seasonal strength. Our direct customer business was up 45%, while our distributor revenue was up 8%. Complete Servers was up 50.1%, while subsystems and accessory business was down 7.7%. Our cloud datacenter business grew 48.3% as we grow our existing relationships and establish new relationships. Turning to product mix. The proportion of revenues from server systems was 71% of total revenues, which was up from 60.1% in the same quarter a year ago and up from 68.6% last quarter. ASPs per servers was $4,400 per unit, which is up from $3,900 last year and from $4,100 last quarter. We shipped approximately 102,000 servers in the quarter and 1,093,000 subsystems and accessories. It's the first time we have gone over 100,000 servers units shipments in the quarter. We continue to maintain a diverse revenue base with over 700 customers. One customer did represent more than 10% of our quarterly revenues at 15%. Cloud datacenter revenues was 29.7%, and storage was 20.7% of quarterly revenues. 63.7% of our revenues came from the U.S., and 41.9% from our distributors and resellers. Slide nine. Non-GAAP gross profit was $106.6 million, up 25.9% from $84.7 million in the same quarter last year, and up 47.2% from $72.5 million sequentially. On percentage basis, gross margin was 16.7% for the quarter. Price changes from Abelcom resulted in no-basis-point change to the gross profit in the quarter, with total purchases representing approximately 13.4% of total cost of goods sold, compared to 13.7% a year ago, and 13.2% sequentially Gross margin of 16.7% is comparable to the prior year's gross margin of 16.8%. Our sales in Complete Server Solutions and strong vendor relationships were positive to margin. These were offset in part by higher cloud datacenter sales which typically have lower margins. Gross margin sequentially was higher primarily due to the strong vendor relationships and higher sales of Complete Server Solutions. Utilization for Taiwan was comparable at 51.2%. Operating expenses were $53.5 million, up from $38.6 million in the same quarter a year ago and up from $47.1 million sequentially. As a percentage of revenue, operating expenses was 8.4%, which is up from 7.7% in the same quarter a year ago and down from 9% sequentially. Operating expenses were higher on an absolute dollar basis year-over-year, primarily in personnel expenses to support development of our new products such as our MicroBlade and Simply Double Storage Solution, as well as our software and support services to support the growth of our total solutions. Sequentially, operating expenses were higher due to higher personnel expenses to support the development of our products and growth of our business, and the difference in foreign exchange gain and loss of $2.4 million. The company head count increased by 120 sequentially to 2,521 total employees. Operating profit was $53.1 million, up 15.3% from $46.1 million a year ago and up by 109.9% from $25.3 million sequentially. On a percentage basis, operating margin was 8.3%, down from 9.1% a year ago and up from 4.9% sequentially. Net income was $38 million, up 13.4% from $33.5 million a year ago and up 130.4% from $16.5 million sequentially. Our non-GAAP fully-diluted EPS was $0.73 per share, up from $0.65 per share a year ago, and up from $0.32 per share sequentially. The number of fully-diluted shares used in the second quarter was 52,113,000. The tax rate in the second quarter on a non-GAAP basis was 28%, compared to 27% a year ago, and 34.2% sequentially. The rate was lower sequentially, primarily due to the retroactive reinstatement of the R&D tax credit in December 2015. The R&D tax credit was made permanent. We expect the effective tax rate on a non-GAAP basis to be approximately 32.2% for the March quarter. The company is working on our tax structure to leverage our overseas expansion, which may reduce our tax rate in the coming year. Turning to the balance sheet on a sequential basis, slide 12. Cash and cash equivalents in short- and long-term investments were $172.6 million, up $59 million from $113.6 million in the prior quarter; and up $86.7 million from $85.9 million in the same quarter last year. In the second quarter, free cash flow was $59 million, primarily due to net income of $34.7 million and an increase in accounts payable of $58.4 million, offset in part by increases in inventory of $27.2 million and an increase in accounts receivable of $17.8 million. We are working on extending our loan facilities to support the continued growth of the company, both domestically and abroad. Slide 13. Accounts receivable increased by $17.1 million sequentially to $314.2 million, due to higher revenues in a seasonally strong quarter. DSOs, days inventory outstanding was 44 days, a decrease of 11 days from 55 days in the prior quarter. Inventory increased by $77.2 million sequentially for up to $486.5 million, due to preparation of inventory ahead of the Lunar New Year holiday and preparation for our Broadwell Solutions. Days in inventories were 82 days, a decrease of 13 days from 95 days in the prior quarter. Accounts payable was $321.2 million, which was 50 days, a decrease of 8 days from 58 days in the prior quarter. Overall, cash conversion cycle days was 76 days, which is 15 days lower than our prior quarter. Now, for a few comments on our outlook. In the second quarter, we grew about 27% in a seasonally strong quarter in which we continue to extend our product lines and execute our business model. Year-to-date, we have exceeded our revenue goal objective of over 20% growth for the year. As we enter the third quarter, we continue our development for the Broadwell launch, but do not expect material contributions this quarter. In addition to seasonal softness of the March quarter for the industry, we are also cautious of the current macroeconomic environment. Therefore, the company currently expects net sales for the quarter ending March 31, 2016 in a range of $530 million to $580 million. Assuming this revenue range, the company expects non-GAAP earnings per diluted share of approximately $0.43 to $0.53 for the quarter. As a midpoint, this will represent our growth of 18% of revenue and 1% in EPS for the prior year. 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 a portion thereof at any time. With that, let me turn it back to Charles for some closing remarks. Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Thank you, Howard. 2016 is shaping up to be a year of robust growth for Super Micro. We see huge opportunities as the market shifts toward software-defined, big data, and cloud-based solutions where Super Micro had great track record of leveraging our solid engineering foundation to produce innovative products and services for those market. We are on target for meeting our fiscal 2016 revenue and growth rate projection of greater than 20%, and with that, I'm confident we will continue to outperform the market and grow multiple times faster than the rest on the industry, most short-term and long-term. Operator, at this time, we are ready for questions.
Operator
Thank you, sir. And we'll go first to Aaron Rakers with Stifel. Joseph Quatrochi - Stifel, Nicolaus & Co., Inc.: Okay. Great. This is Joe Quatrochi on for Aaron. Just a couple of questions if I could. Maybe first start with what type of growth did you see in China? I noticed that you said the Taiwanese facility utilization was, I think, basically flat sequential basis. So maybe the growth in China and then how do we think about the Taiwanese facility utilization going forward? Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Yes. I mean, indeed, we had a very aggressive improvement in our sales and support force in Europe. And now, with global operation, we will support Europe partially from Asia. So, the Asia facility integration will improve. And at the same time, we also started to support some strategic cuts more in Asia, including China. So our utilization rate for Taiwan facility should start to grow gradually. Joseph Quatrochi - Stifel, Nicolaus & Co., Inc.: Okay. And then maybe as a follow-up, can we talk a little bit about the OpEx? I think sales and marketing as well as G&A were up quite a bit sequentially. I was hoping you could talk about the drivers there and how we think about that going forward? Howard Hideshima - Chief Financial Officer: Yeah. Joseph, one of the larger changes between the G&A incline will be the foreign ex that you saw that I mentioned on the call. It's about $2.4 million of delta between the quarters. In September, we had a $1.8 million of foreign exchange, and in the December quarter, we had a loss of about $600,000. So, that – you can see about a $2.4 million delta with regards to the expenses in that period. Joseph Quatrochi - Stifel, Nicolaus & Co., Inc.: Okay. Thanks.
Operator
Thank you. We'll take our next question from Mark Kelleher with D.A. Davidson. Mark D. Kelleher - D.A. Davidson & Co.: Great. Thanks for taking the questions. Congratulations on a strong quarter. Could you just kind of lay out what you're expecting from the Broadwell transition? Are we expecting an upgrade cycle? And it sounded like you're expecting that to kind of come into play in the June quarter. What are you looking for there? Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Okay. Indeed, we have a very strong Broadwell product line. And it's pretty much all available now. And we already sent a sample to lots of customers. However, as Intel obviously announced it won't be available every date this quarter. That's why we do not expect a lot of revenue contribution to this quarter, but that will happen in June quarter for sure. Mark D. Kelleher - D.A. Davidson & Co.: Okay. Thanks.
Operator
Thank you. We'll take our next question from Matt Dhane with Tieton Capital Management. Matthew Walter Dhane - Tieton Capital Management LLC: Great. Thank you. I was curious. Are you gaining traction like wins with some of the larger cloud customer that you heard, previously weren't able to penetrate? I heard you call out a couple of bigger wins and it sounds like that you're gaining traction there? Was I hearing correctly? Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Yes. Indeed. For our cloud based and big data driven company, we recently won favor of them and that high volume deployment is happening I believe is done now and much more will happen again June quarter. Howard Hideshima - Chief Financial Officer: Just to reiterate we did grow about 86% year-over-year so we are gaining as I mentioned, I think, more customers and growing with our existing customers as well. Matthew Walter Dhane - Tieton Capital Management LLC: Okay. Great. And the customer that you did finally penetrate what led to them finally to choosing to work with you? What was the final item that pushed them over and won them into your camp. Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Indeed. Some of them have been using our platform before. And now they find that hey, our computer system is even much better. And at the time is brand new. So we won from both segment. Matthew Walter Dhane - Tieton Capital Management LLC: And is there some of the other larger cloud players that haven't previously used you that are on the cusp from your perspective and maybe getting close to finally moving forward and using you in a meaningful way. Howard Hideshima - Chief Financial Officer: I think we have opportunities in a number of different customers, I think, in the cloud. And like I said, our applications and our solutions play very well. So I think there's great opportunities for us in a variety of different verticals of our servicing. Matthew Walter Dhane - Tieton Capital Management LLC: Okay. Thank you.
Operator
Thank you. We'll take our next question from Rich Kugele with Needham. Kimberly C. Donovan - Needham & Co. LLC: Hi, this is actually Kim Donovan for Rich Kugele. Thanks for taking my questions. What phase of buildout are you in for the San Jose facility? Howard Hideshima - Chief Financial Officer: We're in phase two. Kim, we completed phase one of a five phase program and now we're on phase two. Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Phase one just starting (28:23). And that's an another reason why we are able to enable another couple of big customer. And phase two we just begun two months ago. We'll be done by end of this year. Kimberly C. Donovan - Needham & Co. LLC: Okay. Great. And can you speak to your confidence in hitting $3 billion in revenue in 2017? Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Should be pretty positive. Kimberly C. Donovan - Needham & Co. LLC: Great. Thank you. Howard Hideshima - Chief Financial Officer: Thank you.
Operator
And we'll go next to Nehal Chokshi with Maxim Group. Nehal Sushil Chokshi - Maxim Group LLC: Thank you. Very impressive on your free cash flow generation, looks like it was driven by a tightening of the cash conversion cycle that you talked about, despite the 500 basis point Q-on-Q increase (29:07) customer exposure. So can you talk a little bit about more – about what you did to accomplish this and are the changes sustainable? I.e. is this a new cash conversion cycle that we should be modeling going forward? Howard Hideshima - Chief Financial Officer: Nehal, this is Howard. I mean cash conversion cycle again is somewhat seasonally driven at times too we are obviously continuing to focus on our cash conversion cycle, but we are as we continue to remind folks a very high growth company, so again, it will vary from time to time. Nehal Sushil Chokshi - Maxim Group LLC: Okay. If you look at over the course of the year though on a year-over-year basis, the cash conversion cycle has been increasing, but I think this is a first time in a while that actually not increasing, I think, it's actually come down a bit here. So do you feel like on a year-over-year basis, it can be stable? Howard Hideshima - Chief Financial Officer: Certainly, on an annual basis. I think you'll see a little bit more stability in that. Part of that has to do with – also though the growth in our business. We're seeing great opportunities out there to actually invest as Charles mentioned here to invest in our facilities but I think we have great opportunity there and keep catching (30:29). Nehal Sushil Chokshi - Maxim Group LLC: Okay. Great. Thank you.
Operator
And we'll go next to Alex Kurtz with Sterne Agee. Alex Kurtz - Sterne Agee CRT: Hey, guys? How are you doing? Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Good Alex. Howard Hideshima - Chief Financial Officer: Pretty Good. Alex Kurtz - Sterne Agee CRT: Howard just want to dial-in on the OpEx here for the March quarter. I'm trying to understand is FX impact. I mean we should be modeling down sequentially on OpEx into March. Obviously, on the seasonal weakness in your revenue. But there's some other factor that would also compound the decline in OpEx from December to March. Howard Hideshima - Chief Financial Officer: Well, actually there's two factors that we talked about. The FX, we took a loss of about $600,000 in the December quarter. It depends upon what the FX rate will be at the end of the quarter. Alex Kurtz - Sterne Agee CRT: Great. Howard Hideshima - Chief Financial Officer: Right now it looks positive, but it depends on that. The other thing, I'll remind you guys is again employment tax and those things get reset as of December 31. So they come back into play in the March quarter. So that will add a bit to the OpEx. Alex Kurtz - Sterne Agee CRT: Okay. Should we be thinking about OpEx somewhere between what you did in September and what you did in December just looking at the midpoint of revenue? Howard Hideshima - Chief Financial Officer: I think we haven't given guidance there. But at the end of the day, like I said, I think it's about – I take out the lease look at the foreign ex and you can model that whichever way you like it. Alex Kurtz - Sterne Agee CRT: Right. Howard Hideshima - Chief Financial Officer: Okay. Alex Kurtz - Sterne Agee CRT: Okay. And then on the gross margin, I mean obviously very strong in December here because of the higher revenue, I expect obviously margin to come down on the lower revenue for March or is it something else going on with the mix where you could be above 16%? Howard Hideshima - Chief Financial Officer: For the March quarter are you talking about. Alex Kurtz - Sterne Agee CRT: Yeah. I'm just saying given the strength you had in December, right. Should we – is there a chance that it could be flat on margin sequentially or how are you thinking about that at least? Howard Hideshima - Chief Financial Officer: I think as we look at the drivers for our margin, there's a couple of things I've mentioned on the call. One is the scale of our business growing, the scale of our business per se (32:47) queue us and the first in power that we came from that utilization as we've always talked is one of those other things too that as we utilized our facilities a bit more, we get benefits from that. Certainly, there's opportunities, but also March is usually a very seasonally weak quarter for the industry as I've modeled that. So, looking back at our history, you'll see some perturbations in our margins between quarters. I think if you look back in December last year comparatively to March, I think you'll see about 50 basis point swing between the two quarters. Alex Kurtz - Sterne Agee CRT: Okay. All right. That's helpful. Thanks, guys. Howard Hideshima - Chief Financial Officer: Okay.
Operator
Thank you. And it appears at this time, we have no further questions. I'd like to turn the call back over to Mr. Liang for any additional or closing comments. Charles Liang - Founder, President, Chief Executive Officer and Chairman of the Board: Thank you for joined 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. This does conclude the Super Micro second quarter fiscal year 2016 conference call. We do appreciate your participation. You may disconnect at this time. Thank you.