Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated Second Quarter Fiscal 2017 Conference Call. The company's news release issued earlier today is available from its website at www.supermicro.com. In addition, during today's call, the company will refer to a slide presentation that is made available to participants, which can be accessed in a downloadable PDF format on its website at www.supermicro.com in the Investor Relations section under the Events & Presentations tab. During the company's presentation, all participants will be in a listen-only mode. Afterwards, security, and the analysts and institutional portfolio managers will be invited to participate in a question-and-answer session, but the entire call is open to all participants on a listen-only basis. As a reminder, this call is being recorded Thursday, January 26, 2017. A replay of the call will be accessible until midnight, Thursday, February 09, 2017, by dialing 1-844-512-2921 and entering replay pin 7473642. International callers should dial 1-412-317-6671. With us today are Charles Liang, Chairman and Chief Executive Officer; Howard Hideshima, Chief Financial Officer; and Perry Hayes, Senior Vice President, Investor Relations. And now, I'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Good afternoon, and thank you for attending Super Micro's conference call on financial results for the second quarter fiscal 2017, which ended December 30, 2016. By now, you have received a copy of today's news release that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the Events & Presentations tab. Before we start, I'll remind you that our remarks include forward-looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2016, and our other SEC filings. All of those documents are available on the Investor Relations page at 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 and outlooks. For an explanation of our non-GAAP financial measures, please refer to slide 3 of this presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. And now, I'll turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you Perry and good afternoon everyone. Please refer to our slide 4 through 10. I will now summarize our second quarter. Our revenue over this period was 652 million, it’s 23.3% higher than last quarter and 2% higher year-over-year. Non-GAAP net income was 25 million. This is 50.1% higher than last quarter and 34.1% lower year-over-year. Non-GAAP earnings per share was $0.48 per diluted share compared to $0.32 last quarter and $0.73 last year. We are pleased to report an all-time record high quarterly revenue of 652 million which exceeded our guidance. We achieved this record revenue against tough compare, which included a 15% customer last year. Having a more diverse customer set provides a stronger base for our return to our faster growth trends. In fact, we now have minimal customer engagement than ever from the Fortune 500 and Global 1000 companies. While most of them are still new partner to us, this means we have viewed our reputation, support structure and production capacity that these large scale enterprise customer trust. With these assets, our strength in long term growth become much healthier in both revenue and profitability. As I have mentioned in the previous quarters, we have been building a much stronger foundation by enhancing our technology, operations and global onsite services, as we evolve into a true tier 1 server and storage solution company. This past quarter, the industry faced so much challenges from tightening in the supply of memory DIMM and MEM fresh. We saw a 30% price hike in some cases, [indiscernible] significantly impact on some orders. However I'm pleased that we are able to overcome this challenge since our relationship with vendors and safety inventory systems are much stronger than ever before and are able to help our customers continue along with their…

Thank you, Charles and good afternoon, everyone. I’ll focus my remarks on earnings, gross margins, operating expenses and similar items on a non-GAAP which reflects adjustments to excluded stock compensation expenses. Reconciliation of GAAP to non-GAAP is included in the financial statements for the company, in today’s earnings release and in the supplemental detail in the slide presentation accompanying this conference call. Let me begin with a review of the second quarter income statement. Please turn to slide 4. Revenue was 652 million, up 2% from same quarter a year ago and up about 23.3% sequentially. The increase in revenue from last year was primarily due to our increase in subsystems and accessories, which was up 12.3%. This is consistent with the increase in sales to distributors, which was up 4.4%. In terms of verticals, we saw a growth in next-gen storage enterprise and HPC of 55.6, 220.7% and 122.3% respectively. Offset in part by a decline in Internet sales and cloud of 52.6%. On a geographical basis, we had strong growth in Asia of 55.9%, followed by Europe at 14%, while the US was down about 12.1%. The 23.3% sequential increase in revenues is primarily due to an improvement in server solutions, which was up 24.2% due to more sales from our next gen and open storage business, which grew 25.4% and 28.5% respectively as well as growth in the internet data center cloud of 31.3%, BPC of 92.3% and our enterprise business of [indiscernible]. On a geographical basis, all regions showed seasonal strength with the US up 21.1%, Asia up 43.1% and Europe up 14.4%. In particular, China was up 71.4% as we leverage our existing partnership and created new partnerships such as the one with Fiberhome Telecommunications Technologies Limited, a major telco infrastructure provider in China. Slide…

Thank you, how. Although we’re pleased to beat expectation and deliver record high quarter, we are mostly excited to focus and on pace to return to that strong growth trend that have been our legacy with our robust global operation in these foundations and in the chip based server storage product portfolio. Super Micro is well positioned and ready to set a new standard for our industry and to achieve greater things. Operator at this time, we’re ready for questions.

[Operator Instructions] And we’ll go first to Aaron Rakers with Stifel.

Okay, great. This is [indiscernible] on for Aaron. Congrats on the quarter. Just a couple of questions if I could. First, I want to go back to, you guys talked about you're seeing the impacts from memory pricing and SSD pricing. Did you by chance, I mean, can you give us any color there, did you sound like in a green and blue supplier like you did similar to your hard disk drive back when they had the Thailand flood? And then just kind of coupled with that, how should we think about gross margin because in the past, we've seen gross margin decline sequentially into the March quarter. So I mean is this -- should we expect a similar trend this quarter? And then I have a follow up.

Yeah. Joe, this is Howard. Again as Charles mentioned, we did see some pricing increases up to about 40% plus in some of the pricing between say September and December, but we have taken measures to invest in our inventory as you noticed that we talked about $100 million of increase in inventory and much of that inventory is being invested in component to put us in a good position with regards to the shortages that they exist or tightness that may exist in the market.

And mostly important is we had continued to improve our relationship with key vendors. So as of today, our relationship, partnership have been much stronger than before ever. So that’s why we’re able to guide a relatively more consistent price.

Okay. And then just on the cloud business, it's down year-over-year. I understand it’s a tough compare, you had a 15% customer last year, but even if you strip that out, I think you’re still down year-over-year, just wondering if you can give any color, what type of demand trends you're seeing there?

Yes. We did have really a huge IDC customer, internet data center customer, but with again a lot of Fortune 500 private customers. And we didn’t, I would anticipate much more [indiscernible] become a more stable for both revenue and profitability.

And we’ll go next to Mehdi Hosseini with SIG.

Thanks for taking my question. On the datacenter trend, it is interesting to see more than 30% sequential growth, but you didn't have the 10% plus customer, can you elaborate on diversification of your customer, are these some of the wins from six nine months ago that is now materializing, any color here will be great to better understand the dynamics behind this revenue?

Yes. As I just mentioned, in last quarters, indeed we went out to a, I would say a Fortune 500 credit card customer and their demand had been consistent and because several of them, that's why it's more or less stable and we believe this trend will continue.

So you have, you now have more than one significant data center customer and they’re ramping and is there any opportunity to continue increasing the mix of these customers or now you have multiple customers and they're going to continue to ramp?

Both. I believe we continue to have more Fortune 500 private cloud customer. This will drive sales. At the same time, when our capacity allow, yes, we are also open to grow the relationship with POM, internet data center as well.

Sure. And one rather technical question for you Charles, within the ME adoption increasing, do you see a trend with NVMe on fabric and is that happening, how is that going to impact your all flash rate product solution.

A lot of our NVMe solutions are already fabric based. It’s kind of based on PCI’s reach building in our area. So indeed, the last quarter, we have a specific deal because of those technologies, and we’re detecting that in the marketplace and we saw more and more customer like PCI based NVMe solution.

Would that cause you a risk of marginalizing your all flash array customers or products?

Basically that will improve our profit margin a lot. However, last quarter, the fresh price also raised that up. So it’s kind of partially offset by that.

But I’m just wondering if there is any cannibalization of some of the other customers that are just more of an all flash array solution.

Yes. We saw more and more customers out there.

And we’ll go next to Mark Kelleher with D A Davidson.

Great. Thanks for taking the question. Nice quarter guys. Just wanted to go back to the component shortages. You mentioned that perhaps you weren't able to pass along the price increases for that. Will you be able to, will you be able to work your prices up to incorporate that. That's the first question. And the second question is, can you just explain a little bit more about how building the inventory helps with that issue. Did you get pricing discounts or buying? Just curious.

Hi, Mike. This is Howard. With regards to the passing on pricing to our customers, we are obviously, last quarter, we saw the price increasing quite fast probably in the middle of the quarter. And so some of the contract appeals were already set. Now that we see this out there, we are working with our customers obviously to pass on the differentials with them. So we're actively working on that. With regards to the inventory, how does that benefit us, again, as you see, the prices going up, some extent, we procured inventory, already made the investment into our inventory, so that as prices go up, we do have inventory that we procured at a lower cost to the relative current prices.

Especially because we see some significant order is kind of coming continuously. That's another reason why we keep a higher inventory.

Okay. So could we assume that the shortfall or the surprise this quarter will lead to higher gross margins sequentially, is that a safe assumption?

It’s hard to say, because we don't know what way the prices really change during the quarter.

We bought some of the inventory, Mark, but then again, it keeps on going, we keep on buying inventory, and there still shortages and things of that nature out there.

Okay. And then just a second question, your sub-assemblies and systems did very well, could you just kind of explain the dynamic between that and servers? I know servers have been growing at a pretty good clip and it seems we're having some success back at the subassembly side. What's your thought on that split?

Yeah. I think again with some of the distributors, you saw me mentioned percentages with regard to the distributor percentages growing in there. So some of that distributors are coming to us quite frankly with regards to our products. And then obviously from last year, again the decrease in our data cloud is primarily short server systems affected the mix what percentage is between subsystems and assemblies and complete solution. So again, part of that is driving some of the percentages.

And we’ll go next to Rich Kugele with Needham & Company.

Thank you. Good afternoon. Just a few questions. First when I was just revisiting the gross margin, if you’ve got, I believe you said about ten basis points hit from the utilization and then how, is there any way to quantify the breakdown between pricing versus the component shortages?

Sure, Mark. I think if you look at the sequential decrease which was about 80 basis points, probably that's more again, if you take a look at that, I think you'll see that we had a thirty basis points improvement with regard to utilization and quite frankly, the only other mention in my commentary was the component pricing per se. So if you take a look at all the other factors, you probably see a plus 100 basis point impact from the component pricing.

Okay. All right. That makes sense. And then, Skylake has come out we believe mid-year and so does your guidance include whatever type of air pocket there might be ahead of that arrival?

Yes. This project will be a big thing to us, however early seeding indeed didn’t stop for much. So I believe there will be not much impact for this quarter. As for the official release from Intel, I believe it’s still of our early Q3. So and a really big impact will be Q3 this year, I mean September quarter and early premier for March can be CRD meeting.

[Operator Instructions] And we’ll go next to Alex Kurtz with Pacific Crest Securities.

Yes. Thanks guys and congrats, Charles and the organization on a good quarter here. Just want to clarify, Charles, the Skylake comments. So it sounds like you have some early availability to certain customers in the March quarter for Skylake or the ability to get some initial pricing and benchmarks out to customers in March?

Yes. We start seeding, [indiscernible] much more simple, but really are start seeding, early deployment won’t be a stand much. So how much we can look how with our vendor and our customer.

There is a possibility that you can recognize some Skylake revenue in Q2 then?

A little bit in Q1, more in Q2 I believe.

And then Q2, sorry, Q3 is when, so the September quarter is when the real ramp would occur?

Yes.

Okay. And then Howard on the tax rate, I just want to make sure I got this right, 25% non-GAAP for March?

That’s correct.

That's obviously a big step down here. So should we be modeling 25% going forward or you should be normalizing them back to 30% in the June quarter plus?

The 25% includes related to a tax audit that we completed. So again that would come out like, I think if you take it down to around the 30% or 32%, that’s the improvements that we’re making.

Okay. So the 31 is the more normalized level?

Yeah.

Okay. And Howard, I think I missed the number of units you shipped for ASPs for the subsystems and the units for the components, can you just repeat that again?

Yeah. I’ll remind you, we changed the notes. So for the quarter, we shipped 145,000 notes in the December quarter. That compares to 122,000 notes in the prior quarter and 133,000 notes in the prior year. The ASPs per not was 3100 in the quarter, in the December quarter, 2900 and in the prior quarter and then 3400 in the same quarter of last year. And then, I’m sorry, you asked for the subsystem and assembly. Okay. That was 1,214,000 subsystems and accessories.

1.214?

Yes.

Okay. All right. Can the emerging storage grouping, you said I think it was up plus, it was up plus 55% for that specific group of customers?

Yes.

Okay. And then last question, the success in Asia, was that specific to one of these big Internet data center customers or was that just generally the x86 market in Asia this quarter?

I would like it is spread to stable customer.

Okay. And sort of larger data center type customers Charles?

Pretty wide combination.

And we’ll go next to Brian Alger with Roth Capital Partners. Mr. Alger, please check your mute function. Your line is open.

Sorry about that guys. Hopefully, you can hear me now. Congrats on the quarter. Want to dig in a little bit on the subsystems. Obviously, it was good in the quarter, but it's showing growth again and it's two quarters in a row where we've been up year-on-year after pretty steady, pretty substantial declines throughout all of fiscal ‘16. Is there a specific growth driver here, is it tied to the growth that you're seeing in the embedded and Internet of Things side of things or is there more behind it than just catch up in the channel.

I guess the major reason is because we just finished our operations there. I mean, in that four quarter, as we mentioned, we spend a lot of effort to build up global operation and including IP implementation and global warehouse. So now, all of those have been ready and global onsite is the most ready now. That’s why we’re able to focus on building it and start to grow and we will be coming soon and also on happening new product line. We do believe that the future will be come back to a strong growth again.

So we should be thinking of the subsystems segment as one of the many growth drivers that are running through the system right now and not being a drag on growth?

I guess it grows overall.

Right. Following up on that, the IoT embedded slide, obviously that's now become effectively 10% of the revenue mix. And it's growing at a pretty good clip that market obviously is pretty fragmented and very diverse. Is that a growth rate that we should be at this point or is it just too early days to really get a handle on the forecasting?

Actually I am very sorry, I mean our focus on IOT have been very consistent, growth should be continuous strong.

Okay. Great. And just a house keeping Howard, if you can help us out, you were able off a whole bunch of growth rates for different segments like HBC and whatnot. Going back to the part of the prepared remarks, just say those again.

Sure. It was in the sequential or in the year-over-year. Year-over-year, okay. So in terms of verticals, we saw growth in next-gen stores, enterprise and HPC, right, 55.6%, 220.7% and 122.3% respectively offset by decline in Internet based cloud of 52.6%. That’s the year over year’s.

Great. That’s what I was looking for. Thank you.

And we’ll go next to Nehal Chokshi with Maxim Group.

Thank you. One is that, you increased the number of sizable customer engagement, is that, it sounds like that's the mix between hyper-scale and large enterprise customers, is that a correct characterization there?

Indeed in private cloud customer, and based on micro product and some other between [indiscernible].

Okay. And how big of a driver is IBM’s open-power architecture to the large enterprise customer as well as hyper-scale, the increasing number of hyper-scale customers that you’re seeing? Well, so, I think a couple of months ago, there was a press release on IBM’s open-power architecture, winning a key customer and also highlighting Super Micro as a key supplier within that supply chain. So the question is that, is that a big driver in the increasing number of sizable customer engagements that you’re seeing?

We have some customers like [indiscernible] but at this moment, it’s too early to say.

Okay. And specifically within the private cloud customer, traction that you're getting, it sounds like you're starting to really break through here, are you seeing good traction across all deals or is it specific to say Asia or specific to the United States?

Indeed, it will stop from USA and East Coast, West Coast, we see a lot of demand. And primarily because of our on-site service, product line, visibility of that.

Okay. My second topic is visibility. Your guidance range is again a little bit no more narrow than the prior quarter and two quarters those are very wide. So I take that as an indication of increasing visibility, is that a correct characterization there?

I think that's fair, Nehal. I think like I said, we're coming into the quarter, we're on the edge of a technology refresh cycle. We see a lot of great opportunities as Charles has already talked to about some of the new customers, engagements that we've got going on, those seem to be very good for us.

Okay. Has that improved visibility also partially potentially a result of the different way that you're doing or forecasting and it seems that you have a little bit more consistency in being able to hit your targets over the past few quarters.

Yeah. If we go back historically, we went through a lot of investments last year with regard to SAT and our warehouse and our reorganization. Those investments have been made and have been into the system for now over a year, or year and a half, so some of those things have helped us improve our overall efficiency for that way.

It appears there are no further questions at this time. Mr. Liang, I would like to turn the conference back to you for any additional or closing remarks. Thank you for joining us today and we look forward to talking to you again at our end of this quarter. Thank you everyone, have a great day.

This does conclude today’s conference. We thank you for your participation. You may now disconnect.