Q4 2020 Super Micro Computer Inc Earnings Call
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Ladies and gentlemen.
Thank you for standing by and welcome to the Super Micro fourth quarter fiscal 2020 financial results.
At this time, all participants are any listen only mode.
After the speakers presentation, there will be a question answer session to ask a question. During this session you'll need to press star one in your telephone. Please be advised of today's conference is being recorded if your core any further assistance. Please press star zero I'd now like to hand, the conference over to your Speaker today, James Kisner, Vice President Investor relation.
Okay. Thank you. Please go ahead.
Good afternoon. Thank you for attending Super Micro's coal to discuss financial results for the fourth quarter of physical 2020, which ended June Thirtyth 2020.
And now you should have received a copy of the news release from the company that was distributed the foods a regular treating and is available in 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 the company's website under the events and presentations tab.
We've also published management scripted commentary on our website.
Please note that some of the information you'll hear during our discussion today will consist of forward looking statements, including without limitation those regarding revenue gross margin operating expenses other income and expenses taxes.
Capital allocation in future business outlook, including the potential impact of could 19 on the company's business and results of operations.
There are a number of risk factors that could cause super micro's future results could differ materially from our expectations.
You can learn more about these risks in the press release, we issued earlier. This afternoon armed with recent 10-K filing for 2019, our March 2020, 10-Q and or other SEC filings.
All of these documents are available on the Investor Relations page of Super Micro's website.
We assume no obligation to update any forward looking statements.
Most of today's presentation, we'll refer to non-GAAP financial results in business outlook.
For an explanation of our non-GAAP financial measures. Please refer to the accompanying presentation, which were a 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.
At the end of today's prepared remarks, we'll have a Q and acquisition for sell side analysts to ask questions.
Ill now turn the call over to Charles Liang, Chairman and Chief Executive Officer.
Thank you James and good afternoon, everyone. Today, we had release our feeds cool fourth quarter and really E. Preach code 2020, but any showed results now not to take a look at as some highlights from the quota.
Our fiscal first quarter net sales coke.
And do a 96 menia up 5% year over year, a 16% sequentially.
Hello, FICO Q4 earnings per share was 68 cents.
So I would pizza grows in age applications as some keep it us into and cow customers.
Yes, it was offset by softness from some customers who have seen now worst effect OTA Colby 19 straight.
Before we dive into the financial details I Wonder whether you an update I'll know appeasing these straight teach.
Last quarter, we co Caballo illustrated Teague, hi grows a monte segments.
And we are a nine getting our dsos code they need to be up our gross Florida coming quarter.
And iOS leased for strategic markets.
For us organic enterprise and channel species, including server storage.
And.
Which yellow historical gross areas.
Second our new Fiveg H and typical Pcs.
Third our new large data center and poverty the cow.
Hey flows.
Soda and global cities.
Im pleased to share that we had mandate. Good pub ways is three of these full much categories. This quarter.
The strategic enable us to win more high profile customers among enterprise data center and Fiveg vehicle English gradual build those.
In addition, we continue our investment in growth trend is software and service.
Adopting these teams hey can over the past CEO.
To put it appear a serious of higher value.
Hold on a nice.
Unfortunately, koby, the 19 pose significant disruption on our organic the enterprise and channel business.
As slow Dale gross in the near term.
But we are encouraged by our poke ways in our two new strategic drivers this quarter.
US DC, a cow as well as fiveg in telco.
And did proof that our will grow strategic is working well and will drive a much stronger results in the future.
Going for war, we also plan to accelerate our unique whole nine business into an official phase.
To accompany man hour straight each.
We have been preparing and fine tuning DSPG knees full.
Yes.
I am optimistic a day it will be up putting in new revenue grows and the probably the PDT to us.
How do we move Lisa BG these into when we show fees.
Super Michael.
Right. It is sale in pullback in ambition, which have been the key to our success in the past 27 years.
Our services and beauty embarks.
Application optimization.
And resources savings design Legion separated us from our competitors.
And we are very excited by our race into product introductions last quarter, we I lands and Neil AI and machine learning seasoned portfolio less supports the new Nvidia a one entry peso coal Gpus based on that they piece and.
A peak posses.
And entail come Usan processes.
The with up to five pit outflow ups, Oh pro Formas pull for uses them with Optum also most solution. These systems enable or do you sort of chose to train the most dose of indicate a networks as I'm pretty cdone speed.
Next we introduced a new full way enterprise platform based on the server to inauguration, India Jiong scatter will posses.
Which is optimized to take on deep on DTC and the mission critical applications.
Most of the input entity this quarter on the is a high at all to expand our expansive AMC pulled that nice.
And working closely with our patent us to see the our next generation X. 12.
Entail per se so base Panama.
These engagements where enhanced strong foundation for our gross in upcoming quarters and iOS.
At our recent Mojo stories is some meat.
Will host Pete we saw our partner.
Techniques and entail we discuss our complete Andy do fresh storage portfolio.
That you meant we introduced stalled resistance that awful hi, there that there is an optimized system performance.
Customers, including our brand new second generation tableau the.
Pete and 90 based outage.
It has scale as if.
Hi performance storage and sort of where decline solutions.
Sheeting deal to Fiveg, we have also been recognized recently, but we DCG such as of that pop Fiveg peer Coa in ages solution provider based on the high customer satisfaction.
For its application optimized pulled us.
As pitch beauties compute become more critical for Fiveg inflows tradeshow embodiment issues.
As you solutions.
Optimized to be deeper E manage maintained and secure on that Miss scale.
We see that most of the of Fiveg typical and H. business opportunity.
The all in the face of people emits.
These are present way the Mac share opportunities for Super Michael.
I wanted to get back and talk a bit more above our current quarter and business outlook.
Logistical issues.
Rising shipping coast.
Employee working home home caused by the spread of Koby to 90 in us to be scrapped Hello business is still to.
It's a lower our business.
And.
Revenue by some pull ins.
And increase our position is coast shelter.
At this time, we have been aggressively shifting and growing so 10 operation in the works to Taiwan.
By aggressively and efficiently growing though operation in Taiwan.
Im confident that these big stave of change well, yes.
Bigger long term do war.
Our will close would it be much lower.
When our operation.
Adoption body, I mean, Taiwan Rex.
However, we will also continue to optimize our operation you Ace beta BG knees and production automation to address the able to changing market dynamics.
In summary, we are able to continue our gross moderately despite the continuing to disruption caused by coffee 19.
We will provide a near term outlook to be dead rephrase.
Sundry dow's formed us rates of coffee 19.
However, we are very encouraged.
So we look into that future.
So that piece the will continue to progress evolve and grow.
Rest assured.
We are using these pvl of disruption as an opportunity to improve our business grow both structural by shifting and growing certain portion of operation production and R&D to Taiwan.
A much lower cost of the country.
In less Cobi 19 disrupted area.
In this change will result in our midterm and long term businesses revenue and profitability gross.
Our enhanced mix of hardware software and service type body to focus is that a past four wall for us to build hail pull diabetic.
Gross margin and revenue grows over time.
Our strategy will empower Super Michael do you accelerated our revenue and gross and reduce our loan.
Story of.
Strong market shale good.
This is that we've been very bullish on our long term opportunity to penetrate our roughly 100 BD and Tim.
Finally, we are pleased to announce today, a $30 million stocker.
Repurchase program, although less starting among is a multistem, we will lead to start utilizing our cash on hand to increase shareholder value, while maintaining sufficient cash should resource to fund our operations and aggressive growth rate.
Let's start at repurchase program Refracs Hello.
Ongoing commitment to improve the value of our common stock and we are ahead of us to offset dilution from our equity Brett.
I will now and co over to Kevin to be viewed our does out over a quarter in more detail.
Thank you Charles.
First I'd like to thank our employees customers.
Investors and partners for their support as we navigate the ongoing challenges of the covert 19 pandemic.
Before jumping into the details of the quarter, we'd like to provide a brief update on the status of our operations.
Recall, our largest production employee presences in San Jose, California.
We continue to operate under increased safety measures for the health of our employees.
While we have adapted well to current conditions, we continue to maintain a higher level of inventory and are adjusting our logistics to moderate costs.
All that said, while we aren't satisfied with our operating profitability. This quarter, we're proud of our results under these unprecedented times.
While we don't have unique insight into the long term trajectory of a global economic recovery from Cowen 19.
We believe that much of the effects, we are seeing on our financials today.
Over the near term will likely prove transitory.
Now, let me turn to the details of the quarter.
Our fiscal fourth quarter revenue told it totaled $896 million.
This reflects a 16% quarter on quarter increase from the third quarter fiscal 2020, and a 5% increase from the same quarter of last year.
Systems comprised 83% of total revenue and volumes of systems and nodes shipped were up sequentially and year over year.
System, ASP increased quarter on quarter, but decline year over year.
Turning to geographic performance on a year on year basis, the us was up 4%.
EMEA grew 13% and.
In Asia was flat.
On a sequential basis us sales grew 27% as we saw strength at a number of Internet data center and enterprise customers.
EMEA grew 3% and Asia grew 2% sequentially.
Before moving down the PML I'd like to point out a number of discrete items worth noting for investors.
First.
We recorded 17.4 million an expense related to incentive awards to our employees that impacted both cost to sales and operating expense.
Remember on our February call, we mentioned that we had expected to incur additional onetime charges of $35 million to $40 million.
Sorry.
We paid out approximately $26 million for those awards, whose performance criteria was achieved in this quarter.
Third we recovered to $4.8 million from customers related to previously reserved bad debt.
Lastly, we released $3.3 million and tax reserves following the finalization of certain foreign tax returns for prior years.
And our tax rate was reduced for export sales from the us.
Turning back to our non-GAAP results Q4, gross margin was 14% down a 150 basis points year on year, and 370 basis points quarter on quarter.
As you've likely heard from other market participants commodity costs have been volatile.
Gross margin was impacted by commodity costs covert related costs and customer mix in that order of magnitude.
Turning to operating expenses Q4, opex on a GAAP basis decreased 3% quarter on quarter 214 million.
On a non-GAAP basis operating expenses increased 5% quarter on quarter and year on year to 91 million.
The sequential increase in non-GAAP Opex was primarily due to the absence of $9.8 million, an R&D credits the previous quarter.
DNA also benefited from the Apple mentioned.
Recovery.
Other income and expense was a 0.7 million dollar loss as compared to zero point $9 million gain last quarter related to the foreign exchange re measurement of our Taiwan dollar denominated loans.
This quarter, our taxes were 7 million dollar benefit on a GAAP basis, and a $2 million benefit on a non-GAAP basis.
In both cases, we benefited from our new tax structure and settlement on the tax audit as highlighted in the discrete items mentioned earlier.
Lastly, our joint venture contributed income of $3.5 million this quarter as compared to a $1.1 million less in the previous quarter, an income of 0.9 million and the same quarter a year ago.
Q4, non-GAAP earnings per share totaled 68 cents per diluted share compared to 84 cents last quarter and 69 cents last year.
Cash used from operations totaled 96 million as we paid out 26 million related to the onetime employee bonuses and our accounts receivable was up $71 million sequentially on increased sales.
Timing factors contributed to the large Q use of cash in Q4.
And we currently expect cash flow from operations to improve in Q1.
Capex totaled 9 million.
Resulting in free cash outflow of 105 million.
Our closing balance sheet cash position, which excludes restricted cash was 211 million.
This quarter, our cash conversion cycle was 87 days down from 92 days last quarter and within our target range of 85 to 90 days.
Days sales outstanding was 37 days, a payables outstanding totaled 52 days.
And inventory days was 101.
Now turning to the outlook for our business.
The company expects net sales for the quarter ending September 32020, and the range of 720 million to 800 million.
In addition to typically somewhat weaker seasonal trends.
We're cautious given significant economic uncertainty.
We expect gross margins to improve roughly 70 to 125 basis points sequentially as commodity cost pressures abate.
With regard to operating expense the $4.8 million that recovery will not repeat.
And we expect sequential increases in compensation product development and the completion of our yearend audit.
We expect audit costs to revert to normal levels in the December quarter.
We anticipate the GAAP and non-GAAP tax rate to be 18% for the year.
We expect we expect GAAP earnings per share three to 27 cents and non-GAAP earnings per share of 10 to 35 cents both on a diluted basis.
Our management team is focused on driving our company Theres, a continuing challenges presented by covert 19.
Although we are unable to predict the extent to which cover 19 may further impact our business operations.
Financial performance and results of operations, we believe we're well positioned financially and strategically as we continue to serve our customers.
Finally, as Charles mentioned earlier.
We currently announced that our board of directors is authorized the company to repurchase up to $30 million of its common stock in a new share repurchase program.
The program as effective until December 30, Onest 2024 until the authorized trends are exhausted under a tenbfive one plan.
With this small step you're signaling to investors that we're committed to creating shareholder value with an efficient use of capital.
Thank you Kevin.
Operator, we're now ready to open a huge for questions.
As a reminder to ask a question you will need to press star one and your telephone to withdraw your question press the pound or hash key and your first question comes on line of Aaron Rakers from Wells Fargo. Your line is open.
Yes, thanks for taking the question maybe maybe the first question. If you can just talk a little bit about the demand environment.
There's been a lot of discussion out there about kind of the cloud Internet data center large data center customers going through some level of a digestion phase so I'm curious.
What your insight is in terms of the demand profile, there that you're seeing into the current quarter and whether or not you have any kind of indicators of other digestion phase materializing in any extensive in terms of how how material that might be or how long that could last.
Yes.
Hey, good question, we see.
Say that then essentially those are social networking.
You mean, even gaming last the us into having a strong demand do indeed.
Koby nights Npis specialty.
And we have them also folks all on the other side enterprise channel so that kind of.
Really the men in the that did not have a lot in.
In June.
Hello, lack of why now and in our operation and speed in Taiwan over they all closer then we won't be able to more outweighs the participated in those lots death and thanks ill.
And I believe these things and then not being full.
Other operating quarter property.
Yes, they are not going to augment that.
Describing a little bit of what we're seeing in the current quarter. So.
I think evidence that would aligned with what you're hearing from other parties is that as we entered into July.
We definitely saw that our customers were taking a pause after having a strong June.
And.
So I think as opposed to last quarter's comments, where I said, we started off strong and let's see where we go this quarter, we're seeing a pause in July yet.
Just currently now we're starting to see an order.
Flow an order flow pick up so we hope that that is a good turn to.
Our July results, so a little bit different topology as compared to last quarter.
Okay. That's helpful. And then you talk a little bit I think in your prepared remarks remarks about kind of quote unquote significant component cost headwinds, but it sounds like you know those might be abating here as we move into this current quarter can you help us understand or appreciate how how you're kind of seeing component cost trends into this current costs.
Ordering and kind of how much of that 70 to 100 basis point improvement gross margin might be might be assume from component Prost dynamic.
Sure I think what we're seeing is that you know that it got a little bit heated with component cost and things are moderating a little bit.
For us.
It takes time for us to kind of digest inventories that we have on hand, and we believe that you know towards the end of the quarter, we'll be able to see some moderation in component costs I think thats.
A fair portion of what we described in terms of our expectations for GM improvement.
Other things that we continue to battle, our you know the momentary high cost of logistics and freight.
As we kind of mentioned earlier it was tough in the last quarter it kind of loosened up in June.
It was looser in July and seems to be tightening up a little bit but.
Beyond that what we've done as we've looked at some of our.
Components that we bring from Asia to look at.
What are those that we can start shipping by sea might take a little bit more in terms of inventory holding but.
It's definitely worth it when it comes to some Kona components like motherboards and those kinds of things we can afford to do by sea. So what kind of managing that hopefully we'll have some improvement in that arena as well.
Okay very helpful. And then a final quick question, there's a lot of discussion out there about.
Intel timing and I know what might be longer term in nature around the cadence of their product cycle, but any thoughts that you guys might offer in terms of how the cadence of Intel's moves product cycle wise 10 nanometer seven nanometer affects your kind of outlook and appreciating thats, probably a longer term question.
Yes, I mean entail obviously you are known to post call nail 10 nanometer.
And those seven nanometer technology.
Net impact.
However, we also grow and be pulled that line day of waste.
So overall it has some impact well on maybe September quarter long term, we should be able to adjust.
Efficiently.
Yes air and Thats what Mary.
That's one of the considerations as we look forward when I said that product development costs may increase a little bit is that.
Now we have to think about multiple platforms given the dynamics so.
Until his timing and.
Pushing the pedal to the metal little bit more an alternate processors.
Very good thank you very much.
Your next question comes from the line of an Anda borrow from loop capital. Your line is open.
Hi, good asking you guys appreciate you've taken taking the questions.
Few if I could Charles and Kevin.
Kevin.
Just a point of clarification, when you're talking about sort of seeing seeing a pause in July after again and now seeing order flow pick up what does that Youre enterprise and channel business or is that the hyperscale public cloud business.
I think it's we're seeing it on multiple fronts.
So not not necessarily the hyperscale, but probably more traditional.
Okay, Okay great.
Got it say, you're starting to pick up again.
We can actually but the linearity and falling but it sounds like it was really a month of July dynamic.
I do you any context and you can provide for.
For how we should think about like seasonality into December I know, it's probably probably lack of visibility a little murky right now, but but any context.
As for our modeling prop probably be so for us.
Yeah, that's that's a little bit hard to call right now I believe that we all are hoping that things return to normal a little bit.
We have.
Seasonality certainly in December and maybe a little bit better than normal I don't know Charles do you have anything to augment that.
Yes, I mean last September tradition in our salt quarter end December you already.
Hi, how are they in September in the his Tony So do you see I believe we will have some.
In pega leg of that Andro Corona via the impact.
But we are doing weibo, plus with what Jeff ill will close.
We plan for your December 11, much slower quarter.
Okay.
Really helpful. Thanks, a lot.
And I guess that just with regard to the cost.
So the cost optimizing.
Yeah, you highlighted shift.
Production shift to Taiwan.
Got you also mentioned accelerating your online business.
Yes walk us through the different initiatives.
That will help optimize the cost base and then maybe give us some sense.
Of timing of how sort of you might begin to be able to benefit from this optimization effort.
Yeah, I mean lashings.
About nine months ago, or even tailwinds that we saw those.
No in Taiwan, whereas here.
Including engineering the.
Great and even sales even kosmos babies so that.
Transition will well be up now, especially anyhow Corona bias as you may now not put on unbiased impact in Taiwan isn't much.
Then when I see so we we moved into Highlands coastal region and full Corona light of Integra reason as well and.
You know is where did you already helping us and I wouldn't say about December quarter half a mall next CEO.
Being much more even said.
And it's the kind of medium and long term investment by the December quarter, we always see somehow.
As to where all night vision is.
Basically the company mentality BDNA, we'll have our customer will get us uphole, especially sale path at all when they need to the mobility emphasis and they can although from online and that system. We have been preparing for next year and now is it getting many mature so we thoughtful.
Small scale.
In these last few quarters and then we will have a formal obviously I believe Mason.
That's really helpful Shires I really appreciate that.
Let me just sneak one one more in here I. Just this is on Fiveg Foggy initiative.
And then you would need mentioned a couple of times on the call about seeing seeing public cloud progress.
Could you just give us picking context around what's going on right now what you're seeing and experiencing in your fiveg in public cloud initiatives and then appreciating that Kevin you said, it's been sort of.
Upstart.
Let me stop start again.
I would love to get a sense of catch Hilli, what you guys see going on the progress that you've made and then he as you think these can be I don't have an impact in the December quarter, if things come together quickly.
Good. Thank you had a question, yes, I always thought and focused on Fiveg co about elements that go and now we are really engage a handful of blog good sized customers and they have very happy many companies we sell for that so we see a thumb a higher along.
Some of the mobile DRAM.
I mean since last quarter and those to avoid answer them, perhaps in this quarter and December quarter, and especially anyone next year.
And we use our operation.
Growing in Taiwan.
Aggressively now we won't be able to ship really hybridimm pulled out from Taiwan operation and that's why it's at the time, it's a much you okay.
Absolutely.
Hi.
Oh and data center, and we already Oh, what can we see that capital flows potential cost involved and that responds again, so what have been very comfortable so we will continue to push those opportunities.
Very helpful. Thank you guys I appreciate it.
And again, if you would like to ask a question. It start wondering your telephone and your next question comes on line haul chart ski from Northland Capital markets. Your line is open.
Alright, thank you.
Really nice to hear results by the way.
To me a you know significant narrative of the investment team here as well you guys have been talking about.
Turning to our heritage of gaining market share. So what did that investment theme can you characterize how you think you did and the June quarter and what is embedded in your September quarter.
In terms of marketshare trajectory.
Yeah, I mean last quarter I thought of shale, we engage with an others for the beginning right right not just by coal logistics stuff and then cow and then.
Total yeah, Libbeys, no and see the owed us revenue driver we have been growing.
Yeah, Hey, I'll see you away.
Well Fiveg telco, we are any of us them and the whole customers engage notch kinda, we have some customers engage and then sort of way out in Libya, we can path again that cosmos.
Satisfaction and that's why we that who are folded up a mall.
Last call two studies.
Or a customer on that will.
And we expect that these panels that feedback labeed crazy.
Well in his brain.
Okay, and then for September quarter, you expect that outperformance to.
Continue and that's what's embedded in your giant and therefore, you're actually expecting overall market to be down as much as 15% your here.
Compete very directly to you I mean that we'd yes, or more while also feeling Taiwan, especially the operation and September that impact that at the vintage of from that you'd be limited December I would like to say wed be much more to get into 10, and then next year when fuel.
Yeah, I love opinions on that.
I see okay.
And then I'm talking to warm up.
Yeah understood.
And then Kevin you mentioned the gave some additional detail regarding order trends being relatively weak in July is it fair to say it was actually trending down more than 10% your current and lack of July.
Well I'm not going to give a specific number like that but.
July was one where it was sure certainly a week month and so we're glad that we've seen.
The trajectory turn here. So all of that is embedded in terms of the revenue range that we've given.
Okay.
And why was there a lots of than I have no indoor R&D credits can you give more detail and then how should we think that going forward.
Yeah. So last quarter. If you recall, we had a significant one time event, where we received nine in half million dollars from a partner for a cancellation of a program and that's all we're just saying.
Oh I got you there was a screen.
Significant magnitude last quarter.
Right right. Okay. Thank you I'll get back into queue.
Okay.
And again, if you like to ask a question it start wondering your telephone.
And there are no further questions at this time I'll turn the call back over to our presenters for some closing remarks.
Okay.
Thank you I would add who I think you all employee Kosmos in the Investor.
For now continues to pool and sends you put you in a good thing and see you next quarter. Thank you.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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