Q3 2021 Super Micro Computer Inc Earnings Call

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Good day and welcome.

Good day, thank for standing by and welcome to the Super Micro fiscal Q3 2021 earnings call. At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

Instructions will follow at that's on it if anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

Sounds like it's in a context on what's your host Mr call materials.

Investor Relations. Thank you.

Good afternoon, and thank you for attending Super micro call to discuss financial results for the third quarter and fiscal 2021, which ended March 31, 2021.

Now you should have received a copy of the news release from the company at the close of regular trading is available on the company's website.

As a reminder, during today's call the company referred to that presentation. That's available to participate in the IR section of the company's website under events and presentations tab.

We've also published management's scripted commentary on our website.

Please note that some of the information you here during the discussion today will consist of forward looking statements.

Fruiting without limitation those regarding revenue gross margin operating expenses other income and expenses taxes capital allocation and future business outlook, including the potential impact of COVID-19, the company's business and results of operation.

There are a number of risk factors that could cause super micro's future results to differ materially from our expectations.

More and more about these risks in the press release, we issued earlier this afternoon.

Recent 10-K filing for fiscal 2020, and our other SEC filings.

All of these documents are available on the IR section of Super Micros website, we assume no obligation to update any forward looking statements.

Most of today's presentation and refer to non-GAAP financial results and business outlook.

For an explanation of our non-GAAP financial measures. Please refer to the accompanying 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 in today's presentation.

At the end of today's prepared remarks, we will have a Q&A session for sell side analysts to ask questions.

I would now like to turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you Nicole and good afternoon, everyone last quarter, we have performed although goes straight each well by winning new key customers.

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Our global operation.

Introduced.

Whole new generation or hold on.

We did release, our fiscal 2021 third quarter financial results.

Take a look at those.

Some highlights.

Vehicle third quarter net sales totaled.

Hey, Anthony.

On page 6 million up 16% year over year and up 8% sequentially for the first time, two novel company, whose history since the IPO net revenue home seasonally weaker March quarter significant disease subtypes of debt on December quarter.

Hello.

<unk> third quarter non-GAAP earnings per share was 50 spin.

I was on mute point of our previous guidance range of 37 cents from 57%.

In this quarter, we also generated.

Record revenue from the Asia Pacific region, demonstrating our continued and it can be traction in Asia.

We continue to execute our growth strategy of highlights in our recent debt and based on the update on much force.

Our progress judge it by his colleagues on the industry growth rate.

Propel us to resume the position of the plus piece of the growing use of AP.

The studies you manufacturer, mostly importantly, we achieved this growth.

Despite the low so much of our.

Our focus has been on growing the company in the long term foundation.

Earlier this quarter, we introduced the industry's most comprehensive global portfolio leveraging the day piece of processes from both Intel and AMD.

Our application optimized solutions.

Gaining traction among the award is most of the balance data center and enterprise.

We are stable.

On me.

Key customer.

Debt had deeply thousands of server unit net.

The balance sheet growth scenario.

Also these are optimizing systems for a minute verticals such as artificial intelligence pinnacle at all anymore.

One successful example is that low operation with Osaka University in Japan, We saw a decrease of court pitch PCB solution.

We should take a flow of the vintage or a new powerful iceberg of policies.

Hundreds of other customers and have already utilized our early sampling program or ex sales.

New system on nine through our Jumpstart program.

Activities to accelerate about <unk> been good.

This new generation product and propel growth for these came into the year.

In addition to the <unk>.

System sales on our new Cpus.

It is an innovative with non TPU receipts from architectural last quarter, we used the diesel savings in line.

This very strong global demand.

Optimize it to you to non GPU solution delivers greater cost savings guidance sure.

Shale Paolo including <unk> two non system supports so the travel.

<unk> single use pcie Gen four Gpus and is on pace to put it from for video streaming.

In cloud gaming and company's social networking applications.

We have been executing a robust manufacturing plant in Taiwan for a few years.

With attractive new proton from <unk> and <unk>.

Strong.

Customer demand.

We recognize the importance of optimizing operational efficiency and reduce coast.

That's appreciated.

Tighter supply chain.

One on key elements of our strategy.

Our Taiwan campus.

<unk> will increase our capacity and capability in production.

Operation Engineering and sales to deliver more close to optimize the openings.

Manufactured in coast has been our painful challenge since the company was founded 27 years ago.

Now with the new 1 million square feet of manufacturing and office space.

Our Taiwan pinpoint this summer.

<unk> become more.

Profitable by having more control over our global supply chain and manufacturing costs.

Non U S campus expansion, which will be on nine shortly after the completion or the Taiwan expansion, we have focused on the <unk> operation in growth, but we small hamlets.

On the security and made in USA initiative.

Again, this expansion will position us well to handle the ongoing logistical challenge and rising cost.

While further improve our time to market advantage.

<unk> scale and activity.

We are making progress in the key growth factors.

As I mentioned in our based on the Investor.

You then and we are getting.

Greater traction within the critical let's take a bit of a cloud data center and enterprise outcome.

We are securing new design wins and seen expanded orders.

On certain high profile customers.

These customers.

<unk> micro based on the breadth of our portfolio and our ability to deliver based on the optimize the system for the al <unk> telco, AI and both public and private cloud workflow.

We had been efficiently growing our high profile outcome or Hawaii.

And we aim to tableau of these accounts in the coming two years.

Our high profile customer initiatives is a big portion of our organic sales growth strategy.

And that has evolved and been fine tuned overtime.

We also continue our sales transformation.

By further the lunch hour PPP, and Peter C automation, Lisa or telecom with greater pool.

<unk> is already in use we submitted selective customer needs.

On this pool, we are making it much easier to share communication taken with APAC and put out kind of installations, among our sales engineers and customers.

I believe we all accelerated.

Revenue and reduce on a fulfillment time and coast.

Strong positive momentum is building again super micro.

Dave.

Our Q3 growth is just not beginning of our journey to gain more market share gain.

We are depending on pool, our hallmark hold consistent growth.

To align my interest we used at our companies as those straight each day.

Full of director ex paper that proposal would reduce in line and necessary to $1.

And at the end.

Equity compensation package type of very abrasive revenue and stock price target.

Also in our recent investor.

And based on updated polka.

Our path to $10 billion in.

Annual sales in three to six years.

No I had been.

Even stronger confidence to achieve this growth.

Overall, our Perseus Super micro had success in various market segments, such as solid each HCI cloud AI machine learning.

<unk> and others.

<unk> technology leadership through optimizing server and storage solutions.

Im excited that our reason to listen.

<unk> booking activity along with our type.

Capacity expansion initiative, and improving COVID-19 outlook give us confidence to provide the strong Q4 guidance.

Our coming fiscal Q4 revenue.

He will surpass the $1 billion.

On the range of <unk> 80 million to $1 8 billion.

Ian.

Super Micro is finally back on track for profit growth.

Come within debt.

Our growth rate will be getting faster and faster in the coming quarters and years.

I will now pass on a quota maybe Wigan.

<unk> financial officer to provide additional detail on our quarter and our outlook.

Thank you Charles.

Since moving to the CFO role at Super Micro last quarter on even more excited about the future of the company you don't want on joined in 2018.

We continued to execute in all major areas of the company this quarter and are pleased with our results and outlook.

Our fiscal third quarter revenue totaled $896 million. This.

This reflects a 16% year on year increase from the same quarter of last year, and an 8% increase from the second quarter of fiscal year 2021.

Systems comprised 77% of total revenue.

And the volume of systems and nodes shipped were up sequentially and year over year.

System Asps.

<unk> increased year over year and quarter over quarter.

Geographic performance was strong across all major geographies.

On a year over year basis.

<unk> increased 18%.

Asia increased 29% and Europe increased 3% rest of the world decreased 12%.

On a sequential basis U S sales increased 8% quarter over quarter Asia increased 28% in.

In Europe increased 5% with the rest of the world decreasing 46%.

From a customer point of view.

So on increases in sales to large data center and AI customers.

From this point forward unless otherwise noted I will be discussing financial metrics on a non-GAAP basis.

So working down the P&L for future growth.

Q3 gross margin was 13, 8%.

Year over year and quarter over quarter.

In our February earnings call. We stated that we expected gross margin to decline approximately 120 to 160 basis points sequentially.

Due to the lack of a Q2 Q2 discrete cost recovery of that and product mix.

Due to very high demand in our for our products and in our supply chain, we incurred higher transportation and other additional cost I will further address this in the outlook as we do expect some of these cost headwinds to abate.

On the current quarter.

Turning to operating expenses Q3, our opex on a GAAP basis increased 7% quarter over quarter and decreased 10% year over year to $106 million.

On a non-GAAP basis operating expenses increased 6% quarter over quarter and increased 9% year over year to $95 million.

Because last year's operating expenses were offset by $9 $5 million related to a joint product development related settlement fee.

So after removing this benefit Q3, opex would have been down 1% year over year.

As outlined in our February earnings call. The sequential increase in non-GAAP Opex was primarily due to higher payroll taxes and increased R&D product development costs due to the heightened new product activity from the isolate products from Intel than the line product from AMD.

And the 100 products from Nvidia.

Other income and expense excluding interest expense recorded a $1 $4 million gain as compared to a $3 $1 million loss last quarter.

The sequential change is mostly related to FX.

This quarter, our tax game was a $22 million was $2 million on a GAAP basis, and an expense of $2 $2 2 million on a non-GAAP basis.

Our non-GAAP tax rate was seven 6% for the quarter.

Lastly.

Our joint venture incurred a loss of <unk> $3 million this quarter as compared to a loss of $1 5 million last quarter.

Q3, non-GAAP diluted earnings per share totaled 50 50 debt.

As compared to <unk> 63 in Q2 of fiscal 2021 and 84 cents.

On the same quarter of last year.

Cash flow used in operations totaled $124 million compared to cash flow from operations of $63 million in Q2.

Capex totaled $19 million, resulting in free cash flow used of $144 million.

Key uses of cash during the quarter included increases the inventory and receivables as well as.

Capital returned to shareholders through a $43 million through $43 million on share repurchases.

Our closing balance sheet cash position was 179 million, while bank debt was $85 million, resulting on a net cash balance of $94 million.

Turning to working capital metrics compared to last quarter. Our Q3 cash conversion cycle was 86 days, that's down from 92 days and within our target range of 85 to 90 days.

While the absolute level of our inventory increase day.

Days of inventory at 99 decreased.

Days sales outstanding was 37 days, while days payable outstanding totaled 50 days.

Now turning to the outlook for our business.

We expect net sales for the fiscal fourth quarter, ending June 32021 in a range of $980 million to $1 billion $80 million or $1 zero 8 billion.

We expect gross margin to increase approximately 70 basis points sequentially due to both product mix and improved management of our supply chain costs.

GAAP operating expenses are expected to be approximately $108 million and include $7 million in stock option compensation expenses and $2 million in other expenses expenses not included in non-GAAP operating expenses.

We expect our non-GAAP operating operating expenses to be up modestly quarter over quarter, driven by lower NRI and continued investment in our in R&D with the role of our rollout of the new product activity from AMD, Intel and Nvidia previously mentioned.

We expect our GAAP and non-GAAP Q4 tax rate to be approximately 13% and approximately 16% thereafter.

We expect other income and expense, including interest expense to total roughly $1 million and expect a nominal contribution from our JV.

We expect fully diluted GAAP EPS to be in a range of <unk> six to <unk> 77.

And fully diluted non-GAAP EPS to be in the range of 70 to 90.

We expect Capex for the fiscal fourth quarter of 2021 to be in the range of $15 million to $20 million Inc.

<unk> of our ongoing Taiwan building project.

So Nicole I'll turn it back over to you for Q&A.

Operator, we can start with pricing.

Ladies and gentlemen, if you have any question at this time. These price forests, then the number one on your telephone keypad again that is part of line group.

We'll pause for just a moment to compile the Q&A roster.

Your first question is from Mehdi Hosseini from <unk> your.

Your line is open.

Thanks for taking my question a couple of follow ups.

I am just trying to better understand.

As you're looking to the second half, especially given your strong revenue guide for the June quarter, how do you see.

Momentum into September and December quarter.

And how do you see some of the demand drivers like new server CPU.

In other.

Cloud data center delivery related.

Drivers.

Impacting your revenues into the second half and I have a follow up.

Yes.

Even on.

We had to spend on non <unk> April two.

Engage high profile industrial line.

And I'll.

Highlighted share leads to your debt we have achieved.

A Q&A so now we grow our low cost products has relied on comp.

Non about town.

On local then Todd all debt and Thats why we see a market we already have a strong quarter and then Q1, indeed Arlington clinical activity strong will be first time over $1 billion.

In September.

We see that type of alignment.

Yeah.

You start much lift as true.

So each week.

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Handover longtime partner.

<unk> net.

Chelsea this situation continuing on with.

That would be very tough but.

As the old per day.

<unk> now comes from Olive index has been that Pts crazy new growth.

I feel pretty comfortable.

Although the uncertainty every day.

Okay.

And in that context, how do you see increasing commodity prices for.

Instance.

Storage and DRAM impacting you.

Margin profile into the second half.

Alpha amongst the tongue.

Indeed, our customer.

<unk> ex debt with a higher price phase III <unk> study.

Profit margin and a waiver tie up quickly.

Most of the customer had HOS expense because it's.

Kind of surprise 90 pages day fill out we led to wider possibility to negotiate that based on.

On <unk>.

Houston flower sales for our customer, but that did see any more.

Most of the pipeline with pain and <unk> expense.

That post IPO.

Just a quick follow up have you been able to.

Build a strategic inventory.

So that you would benefit from lower cost as you.

Think about the Nick as you think about the shipment over the next let's say six months or do you have to continue to buy higher cost inventories and then you would pass on that incremental cost to the customer.

While it is a big question.

<unk>.

Net Turkey.

Since.

Minimal debt growth, but yet you arrived we had increased our inventories came to us I would add to the states of the macro growth.

I think not being day area by field inventories.

We saw on growing really stollmack demand.

Very soon on me.

We had to add kind of on a pay higher for that union in particular.

Got it thank you.

Thank you.

Your next question is from Ananda Baruah Your line is open.

Yeah. Good afternoon, thanks for taking the question and congratulations on the results.

And putting them up.

Just after you had on the analyst day volume, so that's pretty exciting to see.

Yes, a couple of a couple of follow ons.

On the direction that many risk on to asking questions could you give a little a little more complex.

And the key vertical areas, we are seeing.

The most pronounced.

So I guess kind of off the top of my head on thinking Hyperscale cloud customers.

Versus large enterprise customers like on premise.

And also on the carriers for five day, and I know, there's no activity going on in each.

In each of the buckets, but just interested in getting context as to where youre seeing the most pronounced pick up appreciate it.

Okay. Thanks.

Yes. Thank you yes. It is.

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Again, we have been low embedded way out in <unk>. So we started shipping some volume.

At quarter end.

We have a low end low Tampa on Friday customer.

Our casinos are engaged.

On a static growth in part debt demand.

And that's a very good signs.

And net part of our 10 anywhere.

Other than that.

Our price for kind of fee income prepayment.

For medical.

And then we also again some.

Did I catch in debt.

And.

Hi performed the crowd is essentially a private cloud.

Some HPT is the Finnish area.

<unk> Neal.

Inc.

And the.

Nvidia GPU that consume much of most holiday before.

Bye.

<unk> has been a while.

From our advantage as well so we started <unk> and ARPA SBC customer with our optimized basis.

Recruiting solution.

And.

Charles on your prepared remarks.

You mentioned accelerating revenue growth I think you said in the coming quarters.

As well as over kind of in the coming years, and then I guess coming quarters I don't want to pin you down too much but should we expect and can that occur over the next four quarters.

Yes.

And how.

How much.

I guess do you have.

It is a situation where you think the timeline next Steve let's say four quarters.

Do you feel like you have the account traction currently to do that.

Or does that involve.

New account work.

Or sort of new penetration conversations inside of existing accounts on the yet to occur.

Actually we filled on efficient accounting, although India demand.

And that's why we are at $10 low capacity, especially in Asia.

Quickly and we saw higher very high scale.

So we are.

Again low.

Telfer high profile coming in does that free online and those are kind of part of the audit and we will continue to engage in those high profile type.

We have enhanced our sales team, including on our feet as B.

Automation system net.

Although I'll cut into sales.

April so our sales and focus more on high profile coming on so.

Belief.

Based on day net.

<unk> excuse me.

On the quarter in the year.

And last one thanks, Charles and last one from me is is it Jean Marie accurately June debt, they need Taiwan centers opening up growth.

Gotcha.

In June or July we've not final yet it can be easily handle it depends on the situation.

Okay. That's great. Thanks, so much.

Thank you.

Yeah.

Again that is <unk> to ask a question.

Your next question is from Jonathan on one thing Youre line is open.

Hi, guys. Thank you for taking my questions on very nice quarter, and nice to see that demand out there.

My first question is.

What kind of gross margin do you think you can get in the September quarter, and I know, there's a lot of moving parts.

On that especially given the inflationary environment. We are in your facilities coming on line with ship over to cost.

Sales tools, which improve your efficiency I think you alluded also that you are burning through inventory at a lower cost. So I'm just wondering.

With all the puts and takes to your thinking on improved from.

The current quarter interest.

September quarter on beyond that.

Yes, I can say in Egypt, and David you followed by detailed I mean March quarter, we have a lot of blood or super by EBITDA.

Because the customer.

Perfect.

So a shipper.

By Ah and Nash.

A lot to buy.

Approaching from Alexander So we faced on overhead EBITDA for the March quarter, and then moving below.

Doing well.

Remember a situation where the much improved maybe we can edison.

So.

John as we mentioned.

The asps are up quarter over quarter and year over year. So so we were.

We're looking forward to two improving our margins toward our target that we outlined back on March 4th.

<unk>.

14% to 17% so.

I think that's our that's our general guidance.

Okay, great. Thank you for that and David can you actually talk about your expected.

Your expectations on cash flow as we get through the next couple of quarters I know you used a lot this quarter. Thanks.

To see buybacks as well.

As demand ramps do you see yourself using more cash or do you think youll on collect from that back on just your general thoughts.

Sure that's a good question.

We returned $43 million back to shareholders. This quarter. In addition to growing accounts receivable and inventory and so on and also.

Continuing our capital improvements and Taiwan, So as we complete our our Buildout in Taiwan.

The cash demands.

Well.

Get over there and and also we've already grown our inventory now to over $900 million and so so we expect debt.

The growth rate of inventory is not going to be the same as it was during this quarter. So this quarter was especially demanding because we had such a we had such high demand and so so we don't get the rate of acceleration will not be the same.

Got you.

Do you think you'll be cash flow positive in the next quarter or after I guess.

Yes, it's going to depend on it's going to depend on on our growth.

So that's really what it comes down to is how is that.

If we go if we exceed our growth targets.

Okay.

We would tell from buying the stock back from this quarter.

We did a <unk> store and we need a more on a tasteful.

Hey.

Got it it could probably net.

Last one from me I think on the Intel call. They had mentioned that they're more chip digestion in data center are you seeing debt at all on your Intel product lineup in ex U R.

Is it your other products the AMD that day and videos that are driving the strength that you're seeing going forward.

Duke right over the hub, we have a customer.

End of <unk>.

Suddenly simple EPS Epo AMD GPU in the immediate <unk> so at the moment.

Oh please.

On demand.

And also see somehow on the price changes as well.

Yeah.

Okay, great. Thank you.

Your next question is from Nihon <unk> Your line is open.

Yes. Thank you congratulations on the strong results here.

It sounds like the charters of the 8% day relative to net clients was the new customers.

Equally between cloud that's on our customers on AI.

Due to these new customers come with the new products or is it using existing products.

It's a combination we have a low cost.

Customers need a new Gpus that region from India.

And later on new CPU and some these ice day with family to net.

So.

Yes.

Sure.

Most of the growth I believe is meaningful.

We will go down, but even non existent.

Some demand.

Hole.

The retention is.

And of <unk>. So we are working very hard to.

Improved ex situations.

And what about demand on the storage having side of things next gen storage and jump on storage.

Yes.

However, I would say not to us non hub as AI and <unk>.

We see us zone.

Demand.

Okay, and then I think theres been a lot of discussion during the call about.

Price inputs and what that's on.

<unk>.

Issue for a lot of companies out there.

It sounds like you guys have been able to start debt issue just to be clear is it because of the strategic inventory reserves or is it because for us from a more favorable pricing environment such that you can pass on these.

Input price increases to your customers.

I mean that we get a non term contract and relationship with new balance the pilot that head on I would.

Keep without.

Coke kind of smooth or at least stable.

Yes.

Most of the <unk> ex.

Ex type of our hedge through COVID-19.

In both.

Securities Inc.

We are in good condition.

And is that what underpins the confidence and gross margin will tick back up.

June quarter.

Now gross margin premium margin because of <unk>.

<unk> cash expense.

Income cheaper by air.

Albert probably 19 Super by COVID-19.

No.

Super.

And Nevertheless, zero net debt in last few quarters on either a situation and also.

Because of these analysts zone so beyond that.

Production and.

In some cases labor payback type flow of index.

Although two hour.

Sure.

Okay, great. Thanks, good quarter.

Thank you.

I'm showing no further question at this time I would like to turn the conference back to the company for any additional or closing remarks.

Thank you everyone we're doing per day.

And have a good one.

See you next time.

Thank you.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Okay.

Good day.

Yes.

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