Good day, ladies and gentlemen, and welcome to the Super Micro Second Quarter Fiscal 2021 Financial Results Conference 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. [Operator Instructions] I would now like to turn the conference over to your host, Mr. James Kisner, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for attending Supermicro's call to discuss financial results for the second quarter of fiscal 2021, which ended December 31, 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 & Presentations tab. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income 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 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 most recent 10-K filing for fiscal year 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 in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we'll have a Q&A session for sell-side analysts to ask questions. I'll now 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 second quarter financial results. Now let's take a look at some highlights from the quarter. Our fiscal second quarter net sales totaled $830 million, down 5% year-over-year and up 9% sequentially, landing at the midpoint of our guidance range. Our fiscal Q2 non-GAAP earnings per share was $0.63 compared to $0.55 in fiscal Q1 of 2021 and $0.57 in the same quarter of last year. As we expected, Q2 improved after a seasonally weak Q1. We are proud that we achieved these results despite a very challenging environment as the impact of COVID-19 was significantly worse since early November, which impacted our operations, especially in USA headquarter. Over the same period, however, we had significant international growth to offset the weakness in the United States. Quarterly sales in many Asian and European countries were up double digit, and in some case, a very high double digit, which demonstrates the strength and the improvement of our global sales organization and channel partners around the world. I expect this strong international business growth to continue in March quarter and the future. On the topic of our aggressive growth strategy, our new high-profile customers mentioned on our last earnings call the digested recent purchase in Q2, and we remain excited about our relationship with these customers. Additionally, our sales team are continuing their efforts to expand and nurture new opportunity in these accounts for the next few quarters and years. While these efforts have been on track with our internal goal, we have recently speed up our effort to win new accounts addressing the demands. We plan to further accelerate this growth with new incentive programs and executive action. The purpose of these actions, other than to supercharge our…

Thank you, Charles. I'd like to say a few words to our employees and investors. I have enjoyed working with Charles and the very dedicated Super Micro team and helping the company through challenging times over the last 4 years. I am most proud of the work enhancing our company's financial function, providing a stronger foundation for the company to continue to grow as well as our focus on improving operations to generate cash, which enabled a return of capital to shareholders. To all the Super Micro team, we have accomplished so much together, yet there is unfinished work. Carry on. On a personal note, my new role will be in an area where I have strong passion for and also serves a community that I have a long association with. I'm excited to join as the Chief Financial Officer and key business executive to help this organization to reach its objective of delivering increasing value. When announced, this new role will make sense to you all. Before jumping into the results of the quarter, I'd like to briefly touch on several accomplishments we made this quarter on the environmental, social and governance, or ESG front, which we recognize is becoming increasingly important to investors. A few of our recent accomplishments include: one, driven by our efforts to comply with social environmental concerns, Supermicro received a near-perfect audit score from the Responsible Business Alliance at our Taiwan manufacturing site in November 2019 with a score of 196.4 out of 200 points. In December 2020, we set a commitment letter to the Science Based Targets initiative, and We Mean Business coalition, indicating we will join other companies in striving to keep global warming to the 1.5-degree goal and create company targets. We also joined other leading companies in the Green Grid,…

Thank you, Kevin. One quick announcement before entering Q&A, we will be attending the Goldman Technology Conference on February 11 and conducting meetings with investors. Operator, we're now ready to take questions.

[Operator Instructions] We have your first question from Ananda Baruah from Loop Capital.

Congrats on solid results. And Kevin, congrats as well. It's been good working with you. Well, good luck and we'll miss working with you. Yes, I guess a couple if I could. I guess the first one is just broadly speaking, how should we -- how would you like us to think about the various catalysts as we move through the year and the things that we should keep an eye out for and what you're expecting to impact the business? You spoke to a number of them on -- in the prepared remarks, I would just love to sort of get to more context on how we should think about them layering in. Then I have a follow-up or 2.

Yes. I believe our business have been very solid now, except COVID-19, so in USA is still very severe. So we are very carefully taking care of that, while kind of aggressively grow our operation business in Taiwan. So COVID is getting better as now we expect. Our business should be getting to a much smooth -- much strong growth period. So we have a good feeling about the coming quarters or years.

And Charles, when you think about sort of some of the newer aspects to your business, and you mentioned Ice Lake as well in coming quarters, hyperscale, Ice Lake. You mentioned sort of the 5G systems going in to the telcos, which of those -- could you sort of rank for us, even if anecdotal, which ones of those do you think would be the most impactful when you look back on 2021, hyperscale, Ice Lake, the 5G telco business?

Yes, like I just shared with everyone, we start to focus on large data center and OEMs since about 3 months ago. And we already achieved a couple of them. And they start to move. And we believe that volume we will ramp up very soon in this year and next year, I believe. As to 5G telco, again, we already engaged a handful customers, kind of the world-class telco company. So relationship has been created very solidly, and they start to move, some in small volume, and we also expect some high volume will follow very soon, and it will be long-term partnership. So overall, we are very optimistic for our long-term growth.

Okay. Great. I'm going to sneak one last one in here. Charles, I believe it was you in the prepared remarks, you mentioned the analyst event. Do you have a time frame you're thinking about for that?

Yes. You mean the investor event?

Investor event, yes.

Yes. I hope within the next few weeks because we still have the last quarter. But because of COVID-19 as really coming very bad, so we kind of take a wait-and-see. But now look like it seems getting under control. So I hope in the next few weeks, we will have a big investor event, so to share the company plan, future, the momentum with our investment.

That's excellent. So just -- just so I'm -- just to clarify for myself. In the next few weeks, do you think you'll be announcing the date of the event? Or do you think you may actually be having it in the next few weeks or so?

I guess we will announce it in the next 2 weeks, for example, and hopefully have that event in 3 to 4 weeks.

We have your next question from Jon Tanwanteng from CJS Securities.

A very nice quarter. And Kevin, congratulations on moving on to the next phase. My first question is on just hearing Intel when they spoke about the quarter, they thought they were seeing another quarter or 2 of digestion in the cloud and data center space. It seems like you're not seeing that. I was wondering what kind of customer are you seeing strength from that's maybe running counter to what they're saying? Is it maybe just from AMD? Or is it another end market? Just give me a sense of why your strength is running opposite to what they're seeing?

Yes. As you know, we have a very strong Intel product line. At the same time, we also have a pretty big AMD product line. So once the market have demand, we will grow. And even if the market keep flat, because of our outstanding product, our kind of data solution overall, so we believe once the market is not too bad, we will have a chance to grow smoothly kind of -- and if the market is growing, I guess our growth will be very significant. And as you know, since the company was funded since 1993 to 2017, our growth has been always much faster than the industry average, and I believe we are getting back to that position very soon.

Okay. And then just on the impact that COVID has had on the business, can you call out just the impact on either the margin or the revenue that you had in December and into January so far? You mentioned higher freight expenses, but lockdowns probably had an impact as well. I don't know if you're seeing anything else such as employee absenteeism. But if you could kind of quantify or give some color on the impact of the pandemic so far, that would be helpful.

Yes, it's kind of -- impact is very bad and very broadly, unfortunately, in that -- more than 9 months now. So our logistical, for example, it's become very harder to ship products. Even from Asia to U.S.A., we see the shipping delay cost increase [indiscernible] or even more, sort of logistic time-to-market delay and logistics cost increase. And then lots of customer work from home and some of our employee work from home. So all of those created a difficulty for business, especially for application optimized solution. And the good thing is that our auto congregator, which is a program to help sales, help our engineers, help our customer to work together to make the best optimized solution for them. The tool is getting ready. I believe by end of this quarter, most of our sales engineer and customer will be able to use those tools. So I'm very excited for the tool to be available in this quarter.

Okay. Great. If you don't mind me asking one more...

Yes, John, this is Kevin. I would just echo what Charles has said is that when you have work from home, it definitely reduces the coordination of the organization. So we have to push harder in that arena. And then some other examples like just having to confirm that there's someone else on the other side to receive the shipment, not all companies are open every day. So there's definitely a lot of little different things like that, that make conducting business more difficult, like Charles had said.

Understood. And if I may ask, looking beyond the pandemic, and Charles, I know your new facility is opening up in the second half of this year or earlier this summer, what can margins look like on a normalized basis? So without all of these headwinds, when you have new facilities and when you have some more volume than the customer shipping, maybe share some of the plans you have and go where margins could go.

Yes. As you know, we have two kind of customers. One is a high-end enterprise. We like our better product, better performance, better service. And then we also have another customer who buy high volume and they want lower cost. So before most of our operations are tied in U.S.A and with COVID-19, the impact was really big. But now we have a tower in operation getting ready, especially by early summer, we will have a much bigger capacity. So we can start to service those customers who buy high volume and cost sensitive. So we are very excited. We start to line up with those customers since about 12 months ago. Now we have some customer relationship that are already established and we already promised them that we are ready to support them. So in terms of how much impact, I would like to say maybe 2% or a little bit more than that. And 2% for enterprise, something that small. But for high-volume customer, that 2% or 3%, indeed, is a big difference for them. So we are very happy we have those opportunity now ready from Taiwan.

We have your next question from Nehal Chokshi from Northland Securities.

Congratulations on the strong gross margin and a very strong revenue guidance. That's a really nice outlook there. On the net income, the midpoint of the net income that implies about a $9 million [QB] decline. How should we parse that between gross margin and OpEx for the March quarter?

Well, I think we shared that we thought that the gross margin would be declining quarter-over-quarter because of some cost increases as well as the specific mix of products that we're going to ship. So, I would say that you would weigh it probably towards what the expectations are for gross margin in the immediate quarter going forward. That would be the heavier weight, we'll put it that way.

That's very helpful. And then Charles, could you clarify what you mean by large OEM opportunity?

Okay. I mean especially of the pandemic, COVID-19 problems happened, all our Internet, all our social networking company have a strong demand. And those high-volume customers, indeed, they move in high volume, but they want low price, right? So, before we kind of -- did not really focus on those segment of customer. But because our Taiwan operation facility is getting ready, so we start to work with those customers, engaged with them. And we got some very good feedback. So, we are really engaged with some of them. And like what I just mentioned, we ship a small volume now and the high volume should follow later this year.

Okay. So just to be clear, is there a partnership with the HP and Dells to get to the social networks? Or are you just referring to these large Internet properties as the OEMs?

The good thing about Super Micro is in the last 27 years, we already established our brand name and our credibility for quality, for service. And now, especially our management software, our service is global wide, have been well recognized by enterprise accounts. So, we are ready to work with any kind of customer, directly with any customer or we'll go through some OEM. So we open that opportunity.

Okay. And coming back to Kevin. So, over the past few quarters, you guys have returned 50% of free cash flow to shareholders by share repurchases, which is very good. So, I know that you guys said that you wanted investors that you're evolving your capital allocation policy. But is that 50% rate at least a good way to think about how that -- you guys are thinking going forward? And then what about that remaining 50%? Is that basically near the future growth?

Yes. So, I think what I tried to share was that in the new $200 million program, it's got roughly an 18-month or so duration given the date that it's valid through. I think investors that I've worked with know that we take an incremental approach, and we took first two steps in stock buyback program. We got feedback that if we feel confident, we should back that up by maybe a more longer-term program, and that is exactly what we have done. So therefore, it's a step-by-step process. I think the competing forces for the capital allocation is going to be the rate of our growth. That's the key thing. And we hope to be able to continue to grow strongly and have the adequate cash flow to consume or to fully execute that $200 million program over the 18-month time frame. So, it's definitely that as well as the investments we need to continue to make in R&D for continued product development. Given that, as it relates to Taiwan, we're kind of in the late mid-innings on the investment there. Certainly, the building is close to being completed there. I think it's going to be June or something like that, Charles?

Yes, June.

And so therefore, that consumption of cash will abate for a while because our maintenance capital is like $5 million to $7 million a quarter. And so that will help free up some cash in the second half of calendar 2021. And that's kind of the moving pieces that we're thinking about. And with the continued cash generation of the company, we felt confident to get to $200 million program.

Okay. Fantastic. And my final question, before I get back in the queue is that you mentioned that NRE work was part of that R&D Q-on-Q decline. So, what's the decision for when Supermicro sets this type of work? Can you talk about that real quickly?

Yes. So, we worked very closely with some of our chief component suppliers to work on platforms that work with their key components. And so, we really look to work with those key vendors to enable platforms that we believe are ones that are going to get traction in the marketplace. So, we look at what's the likely popularity of those platforms and then enter into those arrangements. They tend to be rather short term in nature. So I want to share with you that it's not like a multiyear development, but rather maybe a half year development. So, it's a little bit easier to make those commitments because -- but not only they're not so large, but also the prospects for the product are pretty close in the future.

Yes. I'll try to -- also the pace, basically. We have some very close partner. They really want us to present something unique, something that outperform for the market. And also some customers, they want to really outstanding, unique platform design. So we work with both vendors and customers, so for those special design and usually they pay some NRE.

What's the type of return in terms of revenue or gross profit dollars you can typically see when you pick this type of NRE product that expect to become a platform that drives future sales?

For sure, our goal is not for NRE data. Our really goal is for a partnership. When you work with a vendor to design, really optimize the solution, then we together approach the market. Same thing for customers. Some customers with their special application or data center equipment or architecture, we have planned, designed something exactly optimized for their environment. And because of Building Block Solution nature, makes Supermicro are much easier and much more efficient to design those unique solution model.

[Operator Instructions] We have your next question from Aaron Rakers from Wells Fargo.

Yes. Congrats, I guess on this awesome -- and Kevin, also great working with you in the past. I guess I wanted to ask a question about kind of where we stand on the server cycle and the impact that we can think about this having for Supermicro. So you talked a little bit about Ice Lake. You've got AMD Milan. How do you guys see the demand profile for these next-generation server CPUs materializing? And would you expect to see an ASP uplift benefit Supermicro as these next-gen CPUs come into the model?

Yes. As you know, a new generation process or platform always outperform the previous generation, right? For the same price, usually, they are kind of 10% or up to 40% faster performance, right? So for sure, a lot of our large customers, they want a new generation product. And Supermicro is good for that kind of it's our building cloud solution. Traditionally, we always introduce new technology to market a few months or a few quarter earlier than others. So this time, we have that advantage again. And other than the market grows, indeed because we have better solution, or better service, better quality, so indeed, we are gaining much share from others as well.

Okay. And I guess maybe dovetailing off some of the earlier questions around industry kind of supply chain alignment and juggling through kind of the COVID challenges that you've had. How would you characterize the component supply chain or component availability that you see in the market today? There's been some indications that certain areas have been tight or even constrained. What's your current outlook? Have you seen any constraints? And what are you expecting if you're willing to look out over the next couple of quarters?

Yes. We saw a lot of constraints across almost all different kind of components. So we have been very carefully engaged with our partner and have a forecast, have a kind of a contract. So logistic costs also increased, lead time also increased. But with our contract and relationship, at this moment, I feel there are a lot of challenges, but we should be safe for our smooth growth.

Yes. Yes. And then the final question I just wanted to ask was that I know a couple of years ago, you did have a customer that had accounted for 10% of revenue. Do you think that with these new larger data center win opportunities that sound like they're going to ramp over the next couple of quarters, do you think you'll have a situation where you have a 10% customer in the future or not?

Hard to say, hard to say. But we try to have many more customer because our customer base was still small compared with our long-term goal. So with now a much bigger capacity, so we are able to engage with many more partners. So I believe that question yes or no, it will happen. It's happy to have -- it will not happen, it's also happy to be more diversified. So I'm pretty neutral attitude for that and look at where it seems will be under managed.

We have your next question from Nehal Chokshi from Northland Securities.

Yes. So I am actually particularly impressed with the guidance given that at the September quarter call, you guys had indicated an expectation that I think Ice Lake would become generally available for several OEM launch by early 2021. That hasn't happened yet. And that looks like it's going to be more of a 2Q '21 type of event now at this point in time. So given that context, does that mean that the rest of your business has significantly strengthened relative to what you thought would be the case back at the 3Q '20 call?

Yes. As -- I guess, Supermicro a have much more diversified product line now and also customer base in terms of vertical, in terms of many more customers. So we are a much more diversified customer -- a diversified company now. And with our extension to Taiwan and also our capacity growth in U.S.A., we are ready to be a much bigger size content.

Great. And speaking to that much greater diversity and exposures, can you give us a sense as to what is your exposure to some of these faster-growing parts of the market that you're addressing?

Yes. For example, telco 5G, we did not focus on that market before. But since about 2 years ago, we start to focus on this market, and we're already engaged with some very good partner globally. And for example, a large data center and OEM, we did not really focus on that segment in the last 10 years. But about 12 months ago or 18 months ago, we started to engage with some, and we have a good achievement. Also for IoT, we continue to extend our IoT product line. So Supermicro indeed likes to be a much more diversified, much service customer as a one-stop shopping company partner.

So would it be fair to say that these 3 areas that you just highlighted represent maybe 30% of revenue now?

We did not see that specifically. But that's why, we just mentioned, Supermicro is great to grow company to be a $10 billion revenue company in the near future. And in our investor event, we will share more detail about that.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Charles Liang, Chairman and Chief Executive Officer. Sir, please continue.

Yes. Thank you, everyone, for joining us today, and looking forward to meeting you next quarter. Have a nice day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.