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spk04: Good day. Thank you for standing by. Welcome to the Supermicro 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, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Mystical Notios with Investor Relations. Thank you.
spk00: Mystical Notios Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the third quarter of fiscal 2021, which ended March 31, 2021. By now, you should have received a copy of the news release from the company 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 referred to a presentation that's available to participants in the IR section of the company's website under Events and Presentation Staff. We've also published management scripted commentaries on our website. Please note that some of the information you hear during the 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, and future business outlook, including the potential impact of COVID-19 on a company's business and results of operations. There are a number of risk factors that can cause Supermicro's future results to differ maturely from our expectations. To learn more about these risks in the price leads we issued earlier this afternoon, our most recent 10-K filing for fiscal 2020, and our other SEC filings. All these documents are available on the IR section of Supermicro's website. We assume no obligation to update any for the statement. Most of today's presentation 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 in the supplemental information attached in today's presentation. At the end of today's prepared remarks, you will have a Q&A session for self-analysis to ask questions. I'd now like to turn the call over to Charles Liang, Chairman and Chief Executive Officer.
spk07: Thank you, Nicole, and good afternoon, everyone. Last quarter, we have performed our growth strategy well by winning new key customers, extended our global operation, and introduced a whole new generation of products. Today, we have released our fiscal 2021 third quarter financial results. Let's take a look at some highlights. Our fiscal third quarter net sales totaled $896 million, up 16% year-over-year and up 8% sequentially. For the first time in our company's history since IPO, the revenue from seasonally week March quarter significantly surpassed that of December quarter. Our physical third quarter long gap earning per share was $0.50, above the midpoint of our previously guide range of $0.37 to $0.57. In this quarter, we also generated record revenue from the Asia-Pacific region, demonstrating our continued and expanding traction in Asia. We continue to execute our three-year growth strategy highlights in our recent investor update on March 4th. Our progress, judged by historical industry growth rate had prepared us to resume the position of the fastest-growing EUSA-based server storage manufacturer. Most importantly, we achieved this despite so much of our focus had been on growing the company's long-term foundation. Earlier this quarter, we introduced the industry's most comprehensive server portfolio, leveraging the latest processors from both Intel and AMD. Our application-optimized solutions are gaining traction among the world's most advanced data centers and enterprises. We have several commit earlier ship customers that have deployed thousands of server units. led by our super-series. We also set up optimized systems for many verticals, such as artificial intelligence, telco, cloud, and more. One successful example is our cooperation with Osaka University in Japan with our liquid-cooled HPC solutions, which take full advantage of our new powerful ice bag processor. Hundreds of other customers have already utilized our early sampling program or accessed the new system online through our Jump Start program. These activities to accelerate the deployment ramp of this new generation product and prepare growth for this calendar year. In addition to the system based on the new CPUs, We released an innovative new GPU system architecture last quarter with resource saving in mind. With very strong global demand, the optimized 2U2NOT GPU solution delivers greater cost savings utilizing shared power and cooling. This 2U2NOT system supports three double-width or six single-width PCIe Gen4 GPUs. and is the best platform for video streaming, high-end cloud gaming, and companies' social networking applications. We have been executing a robust manufacturing plan in Taiwan for a few years. With attractive new product lines and strong customer demand, recognize the importance of optimizing operational efficiency and reduce cost, especially with a tighter supply chain. As one of the key elements of our strategy, our Taiwan campus expansion will increase our capacity and capability in production, operation, engineering, and sales to deliver more cost-optimized offerings. Manufacturing costs have 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 added to our Taiwan campus this summer, we will become more profitable by having more control over our global supply chain and manufacturing costs. Now, U.S. campus expansion, which will be online shortly after the completion of the Taiwan expansion, will focus on similar operation goals, but with more emphasis on security and Made in USA initiatives. Again, this expansion will position us well to handle the ongoing logistic challenge and rising costs while further improve our time-to-market advantage and production scale and agility. We are making progress in the key growth factors, as I mentioned in our base center investor event. And we are getting greater traction within the critical segment of our cloud data center and enterprise account. We are securing a new design wing and seeing expanded orders from certain high-profile customers. These customers are choosing Supermicro based on the breadth of our portfolio and our ability to deliver the best optimized system for their 5G, telco, AI, and both public and private cloud workloads. We have been efficiently growing our high-profile account worldwide. and we aim to double this account in the coming two years. Our high-profile customer initiatives is a big portion of our organic growth strategy that has evolved and been fine-tuned over time. We also continue our sales transformation effort by broadly launching our B2B and B2C automation with the auto-configurator tool, which is already in use with many selected customers. This tool will make it much easier to share communication, technical data, and product configurations among our sales engineers and customers, which I believe will accelerate revenue and reduce fulfillment time and cost. Strong positive momentum is building again at Supermicro. I believe our Q3 growth is just the beginning of our journal to gain more market share again. We are returning to our hallmark of consistent growth. To align my interest with the company's growth strategy, the Board of Directors accepted a proposal of reducing my annual salary. to $1 and add an equity compensation package tied to very aggressive revenue and stock price target. Also in our recent investor update, I talked about our path to $10 billion in annual sales in three to six years. Now I have even stronger confidence to achieve this goal. Over the past years, SimpleMango has succeeded in various market segments, such as storage, HCI, cloud, AI, machine learning, 5G telco, and others. We have established our technology leadership through optimized server and storage solutions. I'm excited that our recent booking activity, along with our capacity expansion, and improving COVID outlook give us the confidence to provide a strong Q4 guidance. Our coming fiscal Q4 revenue will surpass $1 billion in the range of $980 million to $1.08 billion. Supermicro is finally back on track for faster growth, and I'm confident that Our growth rate will be getting faster and faster in the coming quarters and years. I will now pass the call to David Wagan, our Chief Financial Officer, to provide additional detail on the quarter and our outlook.
spk01: Thank you, Charles. Since moving to the CFO role at Supermicro last quarter, I'm even more excited about the future of the company than when I 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 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 also increased year over year and quarter over quarter. Geographic performance was strong across all major geographies. On a year over year basis, the U.S. increased 18%. Asia increased 29% and Europe increased 3%. The rest of the world decreased 12%. On a sequential basis, U.S. sales increased 8% quarter over quarter. Asia increased 28% and Europe increased 5%, with the rest of the world decreasing 46%. From a customer point of view, we saw 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, Q3 gross margin was 13.8%, down 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 discrete cost recovery event and product mix. Due to the very high demand for our products and in our supply chain, we incurred higher transportation and other additional costs. I will further address this in the outlook, as we do expect some of these cost headwinds to abate in the current quarter. Turning to operating expenses, Q3 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. Recall, last year's operating expenses were offset by $9.5 million related to a joint product development-related settlement fee. But after removing this benefit, Q3 OPEX would have been down 1% year over year. As outlined in the 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 Ice Lake products from Intel, the Milan products from AMD, and the A100 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 gain was $0.2 million on a GAAP basis and an expense of $2.2 million on a non-GAAP basis. Our non-GAAP tax rate was 7.6% for the quarter. Lastly, our joint venture incurred a loss of $0.3 million this quarter as compared to a loss of $1.5 million last quarter. Q3 non-GAAP diluted earnings per share totaled 50 cents as compared to 63 cents in Q2 of fiscal 2021 and 84 cents in 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 to inventory and receivables as well as a capital return to shareholders through $43 million in share repurchases. Our closing balance sheet cash position was 179 million, while bank debt was 85 million, resulting in 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 increased, 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 30, 2021, in a range of $980 million to $1.08 billion. We expect gross margins 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 not included in non-GAAP operating expenses. We expect our non-GAAP operating expenses to be up modestly quarter over quarter, driven by lower NRE and continued investment in R&D with the 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 an interest expense, to total roughly $1 million and expect a nominal contribution from our JV. We expect fully diluted GAAP EPS to be in the range of $0.56 to $0.77 and fully diluted non-GAAP EPS to be in the range of $0.70 to $0.90. We expect CapEx for the fiscal fourth quarter of 2021 to be in the range of $15 to $20 million, inclusive of our ongoing Taiwan building project. Nicole, I'll turn it back over to you for Q&A.
spk00: Operator, we can start with questions.
spk04: Ladies and gentlemen, if you have a question at this time, please press star, then the number 1 on your telephone keypad. Again, that is star 1. We'll pause for just a moment to compile the Q&A roster. Your first question is from Mehdi Hosseini from SIG. Your line is open.
spk03: Yes. Thanks for taking my question. A couple of follow-ups. I am just trying to better understand as As you look into 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 servers, CPU, and other cloud or data center-related drivers changing? impacting your revenues into the second half? And I have a follow-up.
spk07: Yeah, I mean, as you know, we have spent a lot of effort to engage high-profile accounts in the last three months. And I'd like to share with you that we have achieved achievement. So now we grow a lot of high-profile accounts. And those accounts, lots of them start older. And that's why we see March, we already have a strong quarter. And then June, indeed, our June quarter will be really strong. We'll be first time over $1 billion. And September, still, we see the pipeline is strong as well. As to the shortage, we're working with our long-term partner very closely, and the shortage situation continues to be very tough. But as of today, our promise from our vendors has been pretty good. So I feel pretty comfortable, although there are shortages everywhere.
spk03: Okay. And in that context, how do you see increasing commodity prices for instance, storage and DRAM impacting your margin profile into the second half?
spk07: For most accounts, indeed, our customers are happy to accept at a higher price. Basically, we keep about the same coffee margin. And whatever higher cost we pay, most of the customers are happy to accept because it's cheaper. uh kind of surprise market basically so uh uh we were doing whatever possible to negotiate the based uh condition for our sale for our customers but this change is uh most of the customers understand and where except uh that codes are just just just a quick follow-up have you been able to build a strategic inventory um so that you would
spk03: benefit from lower costs as you think about the shipment over the next, let's say, six months? Or do you have to continue to buy higher cost inventory, and then you would pass on that incremental cost to the customer? Well, this is a big question.
spk07: Indeed, we understand that shorting will happen since many months ago. So, yes, you are right. We have increased our inventory since, I would like to say, three months ago. So, we have been up in that area. But still, our inventory is limited. With our growing very strong demand, very soon, I mean, we have to... kind of pay higher for the new inventory that you want.
spk03: Got it. Thank you.
spk04: Thank you. Your next question is from Ananda Barua. Your line is open.
spk02: Yeah, good afternoon. Thanks for taking the question, and congratulations on the results and putting them up, you know, just after you've done the analyst event. So that's pretty exciting to see. I guess a couple follow-ons. the direction that Mehdi was kind of asking questions. Could you give a little more context, you know, in the key vertical areas where you're seeing the most pronounced order pickups? And I guess kind of off the top of my head, I'm thinking hyperscale cloud customers versus, you know, large enterprise customers like on-premise. and also the carriers for 5G. And I know there's new activity going on in each of those buckets. We're just interested in getting context as to where you're seeing the most pronounced pickup. Appreciate it. And I have a follow-up, too. Thanks.
spk07: Yeah, thank you. Yeah, it is... Again, we have been growing very well in 5G and telco. So we started shipping some volume in March quarter. And we have a more and more telco 5G customer continue to engage or start to grow demand. That's a very good sign for us. And that followed our trend very well. Other than that, you know, kind of like appliance for kind of semiconductor equipment, for other medical equipment, we also gain some good attraction there. And high-performance cloud, especially a private cloud. and some HPC, especially HPC with new Ice Lake and and new GPU that consume much more power than before. And that's why deep cooling has become our advantage as well. So we start to service lots of HPC customers with our very optimized deep cooling solution.
spk02: Charles, in your prepared remarks, you know, you mentioned accelerating revenue growth, I think you said, in the coming quarters as well as, you know, kind of in the coming years. And so I guess coming quarters, I don't want to pin you down too much, but should we expect – can that occur over the next four quarters? You know, and, you know, how much – I guess, do you have the, if it is a situation where you think like timeline next, let's say four quarters, do you feel like you have the account traction currently to do that? Or does that involve, you know, new account work or sort of new penetration conversations inside of existing accounts that have yet to occur?
spk07: Very likely. We saw that existing accounts are growing their demand. And that's why we are expanding our capacity, especially in Asia, quickly and with a very high scale. So also we are, again, engaging a lot of high profile account in the last 12 months. And those accounts started to order. And we will continue to engage those high profile accounts. We have enhanced our sales team, including our B2B automation system that we have. I know our current sales able. So our sales can focus more on high-profile account now. So I believe very strongly that those will be speaking up quarter out of quarter and year out of year.
spk02: And last one, thanks, Charles. And last one for me is, is it June? Am I remembering accurately it's June that the new Taiwan Center is opening up? for production?
spk07: In June or July, we did not find out yet. It can be either way. Kind of depends on the situation, yeah.
spk02: Okay, that's great.
spk04: Thanks so much. Thank you. Again, that is part one to ask a question. Your next question is from Jonathan Tanwanteng. Your line is open.
spk05: Hi, guys. Thank you for taking the questions in the last quarter. It's nice to see that demand out there. My first question is what kind of gross margins do you think you can get in the September quarter? And I know there's a lot of moving parts, but especially given the inflationary environment, you have your new facility coming online, which should lower your costs. You have the new sales tools, which improve your efficiency. I think you alluded also that you're burning through your strategic inventory at a lower cost. So I'm just wondering, you know, with all the puts and takes, do you think you can improve from the current quarter into the September quarter and beyond that?
spk07: Yeah, I can say a little bit, and David, you follow by detail. I mean, March quarter, we have a lot of products shipped by air because customer satisfaction has been our priority. So we ship some by air and a lot by production from our vendor. So we pay some overhead air for March quarter. And looking forward, we're June or September. The situation will be much improved.
spk01: David, you can add to that. Yeah. So, you know, as John, as we mentioned, you know, the ASPs are up, you know, quarter over quarter and year over year. So, you know, we're looking forward to improving our margins toward our target, as we outlined back on March 4th, of, you know, 14% to 17%. So, you know, I think that's our general guidance.
spk05: Okay, great. Thank you for that. And, David, can you actually talk about your expectations on cash flow as we get through the next couple quarters? I know you used a lot this quarter. You know, it's nice to see buybacks as well. But, you know, as demand ramps, do you see yourself using more cash, or do you think you'll be able to collect some of that back? Just your general thoughts.
spk01: Sure, that's a good question. Because we returned $43 million back to the shareholders this quarter, in addition to growing accounts receivable and inventory, and also continuing our capital improvements in Taiwan. So as we complete our build-out in Taiwan, the cash demands will abate over there. And also, we've already grown our inventory now to over $900 million. And so we expect that 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 high demand. And so the rate of acceleration will not be the same.
spk05: Do you think you'll be cash flow positive in the next quarter or after, I guess, the investments in Taiwan?
spk01: Yeah, it's going to depend on our growth. And so, you know, so that's really what it comes down to is how is, you know, if we exceed our growth targets.
spk07: I agree with you. We will stop buying stock tech for this quarter. The reason is because our business is very strong, and we need more cash flow to prepare inventory.
spk05: Got it. Good problem to have. Last one for me. I think on Intel's call, they mentioned a bit more digestion in data center. Are you seeing that at all in your Intel product lineup? And if you are, is it your other products, the AMDs, the NVIDIAs that are driving the strength that you're seeing going forward?
spk07: Look like all very hot. We have a customer kind of require the solution for Intel CPU, AMD CPU, and NVIDIA GPU. So at this moment, we feel it's all pretty strong demand. And also see some supply strings as well this year.
spk05: OK, great. Thank you.
spk04: Your next question is from . Your line is open.
spk06: Yeah, thank you. Congratulations on the strong results here. It sounds like the drivers of the 8% beat relative to midpoint guidance was the new customers, equally between Cloud S and customers in AI. Do these new customers come with the new products, or is it using existing products?
spk07: It's a combination. We have a lot of customers need a new GPU solution from NVIDIA, right? So that's NVIDIA new GPU, and some is ICD-8, some is NUC. Yes, most of the growth, I believe, is new products. But even existing products, we see a strong demand. The whole limitation is a kind of shortage. So we are working very hard to improve that situation.
spk06: What about demand on the storage-heavy side of things, next-gen storage and J-Bot storage?
spk07: I would say not to us, not as hard as AI and 5G vehicles, but still, we see a strong demand.
spk06: Okay. And then I think there's been a lot of discussion during the call about price inputs and that that's been an issue for a lot of companies out there. Sounds like you guys have been able to skirt that issue. Just to be clear, is it because of the strategic inventory reserves, or is it because there's been a more favorable pricing environment, such that you can pass on these input price increases to your customers?
spk07: First, I mean, we have a long-term contract and relationship with our supplier. That helps us keep the cost kind of smooth or at least stable. And yes, most of the customers also accept our price through the cost. So in both situations, I feel we are in good condition.
spk06: And is that what underpins the confidence in that gross margin will tick back up in the June quarter?
spk07: Now, gross margin pretty much because of shipping charge, especially some ship-by-air. As you know, after COVID-19, the ship-by-air costs grow about I never believe on that, but in that few quarter, that was the situation. And also, because that demand was strong, so we speed up the production, and we, in some cases, we have to pay extra to our vendor, or to our own employee. Okay, great.
spk06: Thanks. Good quarter.
spk04: Thank you. I'm showing you for the question at this time. I would like to turn the conference back to the company for any additional or closing remarks.
spk07: Thank you, everyone, for joining us today, and have a good one. See you next time. Thank you. Ladies and gentlemen, this concludes today's conference call.
spk04: You may now disconnect.
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