Super Micro Computer, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Supermicrocomputer, Inc. First Quarter Fiscal 2021 Financial Results Conference Call. A press release issued earlier today is available on Supermicro's website at www.supermicro.com. During the presentation, all participants will be in a listen-only mode. Afterwards, securities analysts will be invited to participate in a question and answer session. The entire call is open to all participants on a listen-only basis. As a reminder, this call is being recorded Tuesday, November 3rd, 2020. A replay of the call will be accessible via webcast at ir.supermicro.com. A replay of the webcast will be available online for 12 months following the call. An investor presentation and a transcript of management commentary related to Q4 results will also be posted at ir.supermicro.com. With us today are Charles Liang, Chairman and Chief Executive Officer, Kevin Bauer, Senior Vice President and Chief Financial Officer, and James Kisner, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Kisner. Mr. Kisner, please go ahead, sir. Thank you. Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the first quarter of fiscal 2021, which ended September 30, 2020. 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 will refer to a presentation that is available to participants in the investor relations section of the company's website under the events and presentations tab. We have also published manuscripted 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 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 the company's business and results of operations. There are a number of risk factors that could cause Supermicro'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 most recent 10-K filing for 2020, and our other SEC filings. All of these documents are available on the investor relations page of Supermicro'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 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 to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for self-taught analysts to ask questions. I'm going to turn the call over to Charles Liang, Chairman and Chief Executive Officer. Charles?

Thank you, James, and good afternoon, everyone. Today, we have released our fiscal 2021 first quarter financial results. Now let's take a look at some highlights from the quarter. Our fiscal first quarter net sales total 762 million, down 5% year-over-year and 15% sequentially. Our fiscal Q1 non-GAAP earnings per share was $0.55 compared to $0.68 in both the same quarter of last year and in fiscal Q4 of 2020. As we expected, Q1 has been our seasonally low quarter after a traditionally strong quarter in June. This year, despite the continued challenges from COVID-19, we were pleased to deliver revenue and earnings above the midpoints of our guidance ranges. We have been efficiently adjusting to the new normal as a business team essential by the state of California, although there are still lots of area can be and will be further improved regarding COVID-19 impact. At the same time, we have been aggressively growing our operations, R&D, and sales functions in Taiwan, where the COVID-19 impact is much less than that in our U.S. and EMAIL headquarters. During the September quarter, we continued to serve our current customers while enhancing our Taiwan headquarters. capacity, and capability in production, operation, and sales force in order to support our global growth strategy. To sum up, we now have a much bigger and lower-cost campus in Taiwan with better productivity for revenue and profitability growth. This is just the beginning of our tenable effort After recent challenges that I will discuss later, I believe as our Taiwan campus starts to reach higher economic scale combined with our coastal reduction efforts, revenue and profitability growth will be getting much stronger in the coming quarters and years. I have confidence in capitalization on many new market opportunities. in our approximately $100 billion tank, especially in APEC, EMEA, and the U.S. East Coast. We have been pretty successful at achieving a great market share in the U.S. West Coast, and we aim to duplicate this success in other geographic territories. Let me spend a minute to review our traditional business and the three new growth drivers that I stated in the past two quarter-end conference calls. First, our organic enterprise and channel business. Second, our new large data center, public cloud, and OEM business. Third, our new 5G, H, and telco business. And first, our software and global service business. We have made a good progress in each of the four growth drivers. We have added more new enterprise customers to our accounts and gained a couple of top-scale cloud companies. We also have won a couple of top telco partners in each of the EMEA, Asia, and USA territories. Moreover, we see our software and service business continues to gain more adoptions worldwide. With the business foundation we have built and the Cosmo Pipeline, we have mutually continued Progress is expected in each of these growth areas going forward, especially in the new large cloud and OEM and the 5G and telecom markets. I believe that growth will be a big extra revenue to us. Before moving on to technology and products, I want to take a moment to recall and share the cause of our business slowdown and disruption over the past three years. First, our 10K delay in June 2017, followed by our delisting, was a significant distraction to management and employees for over three years. Although all of the concerns and issues were resolved, A few months ago, this disruption had a lasting effect on our business and employee morale. However, we are recovering quickly now. Unfortunately, just as we emerged from our stark disease and resumed growth in December 2019, COVID-19 came to the U.S. and has slowed down enterprise and channel spending badly. And that was our traditional focus. Our sales, operations, and production performance have been impacted since the end of this March. Regardless of this challenge and disruption, I want to share with you that Supermicro is still very strong. Our strong foundation allows us to find ways to overcome these challenges. We stand alone as the only U.S. server hardware solution company which no longer is the record of faster and uninterrupted growth since inception. In the 10 years between our IPO in calendar 2007 and 2017, we grew at a 20% compound annual growth rate. well above that of the industry at about 3% compound annual growth rate over the same time period. Our investors, to keep these facts in mind, we will prove that we are able to recreate the same growth trajectory or even better, very soon. Moving on to technology and products, our unique building blocks solution r d organization is strong and smart at work to expand our product line with extensive growth in our nvidia amd and intel portfolios our bodies leading ai platforms and the commission new intel ice bag product lines will prove that super michael again will be the true hardware industry leader. Some technology highlights in the quarter include the following. First, we introduced end-to-end PCIe Gen 4 phase, 1U, 2U, and 4U AI systems that deliver 6x AI training and 7x influencing performance improvement over previous generations. These AI systems are available with either the latest AMD EPYC processor or the upcoming Intel Ice Lake processor. Second, most importantly, we believe our upcoming X12 Ice Lake product line is absolutely going to be the strongest product line in our history. It will be ready to ship as soon as Intel's new CPU is available. True to our application optimization product strategy, our X-Square product line will provide exactly the best hardware performance for 5G, AI, and telco, as well as mega data center applications. Third, we were also the first to market with a 1U NEX Level 3 certified NVIDIA V100 GPU accelerated server. a key enabler for the transition to 5G. And we also deliver the world's most green efficient supercomputer recently by cooperating with preferred networks. Our system achieved number one in the green 500 with a record-breaking 21.11 gigaflow per watt. which is 15% higher than the previous worldwide record. Given our leadership in green IT, this is reflective of the deeper mission of our company to help preserve our only planet for future generations with products that offer unbeaten energy efficiency. Other than the four business growth drivers, our big production and operation capacity program in Taiwan, our new strong product pipeline, and our new strong product pipeline. The company is also investing in business automation branch, which is our B2B and B2C online business transaction system. We started designing this system five years ago and had recently put extra efforts to finish the phase one milestone. Now we are able to help our sales and our customer to easily select the product configurations and order quickly online. This phase one will be open to our sales this November. After that, we aim to open it up to some of our customers. in a few weeks. While we continue to fine-tune Phase 1 features and configuration optimization, Phase 2 has already been kicked off with a command center-based structure to further speed up and optimize sales performance and customer satisfaction. This innovative sales and service software program will dramatically improve our business efficiency, scale, and quality. In summary, we are back, and we will be soon much stronger than ever before. We believe that the big challenges in the past three years that badly hurt Supermicro are totally behind us now. As we continue to build a much stronger foundation globally, including the much larger new campus in Taiwan. We will leverage this investment to efficiently accelerate our business growth and profitability in the coming quarters and years. I appreciate the patience that investors and our employees have shown to our company during the difficult time. and we aim to reward your support with our faster growth in the near future and long-term success. And I believe that we will become one of the top IT infrastructure providers very soon. As an upcoming investor in Maine and the United States, we will share more details about our scale, scope, and schedule or the new super micro progress that we have been developing to grow into a top player. The key topics will include, A, our four business drivers, B, our unique technology and new product lines for AI, 5G, telco, and large cloud, and our organic business, C, our new campus in Taiwan to lower our business cost. D, our software and service business status. And E, our B2B and B2C business automation program. Welcome to join us at that time. I will now pass the call to Kevin Bauer, our Chief Financial Officer, to provide additional details on the quarter.

Thank you, Charles. Our fiscal first quarter revenue totaled $762 million. This reflects a 5% year-on-year decrease from the same quarter of last year and a 15% decline from the fourth quarter of fiscal year 2020. Systems comprised 81% of total revenue, and volumes of systems and nodes shipped were down sequentially and year-over-year. system AFPs increased quarter-on-quarter and year-over-year. Turning to geographic performance, on a year-over-year basis, the U.S. increased 6%, EMEA declined 12%, and Asia declined 22%. On a sequential basis, U.S. sales declined 8% quarter-on-quarter, EMEA declined 32%, and Asia declined 22% sequentially. From a customer point of view, we saw pauses at OEM, cloud service provider, and internet commerce customers following strong demand in the June quarter coupled with the normal down cycle of demand from large enterprise customers. This was offset by first-time business at the new high-profile customers that Charles referred to earlier. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, Q1 gross margin was 17.1%, up 70 basis points year-on-year and 310 basis points quarter-on-quarter. Recall, on our August earnings call, we stated that we expected gross margin to improve by 75 to 125 basis points, on a sequential basis chiefly due to a reduction in what were highly elevated commodity and freight costs. As anticipated, we did see improvement from these factors, but also we accrued for a recovery of costs paid in prior periods that benefited this quarter by roughly 130 basis points. Turning to operating expenses, Q1 OpEx on a GAAP basis decreased 13% quarter-on-quarter to $99 million. Recall, last quarter's GAAP operating expenses included $16.2 million in one-time incentive awards to our employees. On a non-GAAP basis, operating expenses increased 4% quarter on quarter and 10% year on year to $95 million. The sequential increase in non-GAAP objects was primarily due to the fact that Q4 operating expenses benefited from a bad debt recovery of $4.8 million. Other income and expense, including interest expense, was a $1.5 million loss as compared to a $1.3 million loss last quarter. This quarter, our tax expense was $3.7 million on a GAAP basis and $4.8 million on a non-GAAP basis. In both cases, this quarter benefited from larger tax deductions related to stock-based compensations. Our non-GAAP tax rate was 14.1% for the quarter. We expect our tax rate to approximate 16%, slightly below our prior expectation of an 18% rate. Lastly, our joint venture contributed income of $1.3 million this quarter as compared to income of $3.5 million last quarter and income of $1 million the same quarter a year ago. Q1 non-GAAP diluted earnings per share totaled 55 cents as compared to 68 cents in both the same quarter of last year and in the fourth quarter of fiscal 2020. Cash flow from operations totaled $120 million, driven from an improvement from cash flow from operations of negative 96 million in the June quarter, driven largely by changes in working capital. CapEx totaled $12 million, resulting in free cash flow of $109 million. Our closing balance sheet cash position, which excludes restricted cash, was $300 million, while bank debt was $36 million, resulting in a net cash balance of $264 million. And I'll remind everyone that we completed our previously announced $30 million share repurchase program before the quarter end. when we purchased 1.14 million shares at a weighted average price of $26.24. In our release today, we concurrently announced that our board of directors has authorized the company to repurchase up to another $50 million of its common stock in a new share repurchase program. The program is effective until October 31st, 2021. or until the authorized funds are exhausted under a 10b5-1 plan, whichever occurs first. We are currently taking a tactical and opportunistic approach to share repurchase as we fine-tune our longer-term capital allocation strategy. Turning to working capital metrics, our Q1 cash conversion cycle was 170 days, up from 87 days last quarter, and outside of our target range of 85 to 90 days, While the absolute level of our inventory decline, days of inventory at 118 days, remains elevated relative to history given the lower sales level quarter-on-quarter. And day of sales outstanding was 44 days, while days payable outstanding totaled 55 days. Now turning to the outlook for our business. The company expects net sales for the quarter ending December 31, 2020, in the range of $780 to $880 million. We expect gross margins to decline approximately 160 to 200 basis points sequentially due to the cost recovery discrete event mentioned earlier and higher overhead costs driven by an expected increase in freight. We expect non-GAAP operating expense level to be flattish quarter on quarter. While we're selectively investing in R&D, this was offset by lower audit costs, and actions we took very late in the quarter to selectively reduce headcount. We anticipate the GAAP and non-GAAP tax rates to be 16% going forward. We fully expect diluted GAAP EPS to be in the range of $0.25 to $0.47 to fully diluted non-GAAP EPS to be in the range of $0.35 to $0.58. We now expect our CapEx for fiscal 21 to be in the range of $55 to $60 million, inclusive of the acceleration of the Taiwan building project mentioned earlier by Charles. In the meantime, we remain focused on guiding the company through the volatility presented by this resurgence in COVID-19 and ardently rebuild our business momentum as described by Charles. With that, I'll turn the call back to James for Q&A. Thank you, Kevin. Operator, we are ready to take questions.