Super Micro to Sandy Bridge buyers: Go forth and multiply our profit

Xeon E5 servers touted, disk burden shouldered

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After nearly a year of foot-tapping by whitebox system and component maker Super Micro, it looks like its "Sandy Bridge" Xeon E5 server rollout is finally under way. All of the Xeon E5 processors have been launched by Intel, and therefore customers have begun buying either components or whole systems.

In the final quarter of fiscal 2012 ended in June, Super Micro posted revenues of $275.9m, setting a new record for itself but about $20m shy of what it had been expecting because of various issues. Net income fell by 48.7 per cent to $5.5m, impacted by the same issues that hurt revenues as well as increased research and development costs for the Super Micro X9 server lineup.

One issue that has been frustrating Super Micro is the phased rollout of the Xeon E5-2600 processors, which started shipping in limited quantities last fall but which were only formally announced this March.

And while no one wants to admit it – including Intel and its server partners such as Super Micro – the other issue putting a damper on Xeon E5 sales was that customers were waiting on the lower-end Xeon E5-2400 for two-socket servers and the higher-end Xeon E5-4600 for quad-socket machines, both of which were announced in May.

With the full Xeon E5 line out and Advanced Micro Devices not expected to get "Piledriver" Opterons out the door until later this year or early next, now the processors have settled down and customers can go figure what they need to buy.

As usual, Super Micro founder and CEO Charles Liang laid some of the blame for fiscal Q4's revenue shortfall on the whiteboxer's big processor and chipset partner to the north, but he also conceded that the company got burned by dropping memory and disk drive prices, too.

"Sandy Bridge, this time, the ramp was a little bit late, and that kind of lowered our revenue in the quarter," Liang said in a conference call going over the numbers with Wall Street analysts. "However, the September quarter should be much better."

Super Micro was caught off-guard by disk shortages after the flooding in Thailand in late 2010 and early 2011, and that curtailed sales. So the company bought up a slew of drives and memory components in March and April to meet anticipated demand, and the world being what it is, disk and memory prices collapsed, which put a damper on top line system sales and whacked margins.

The margin pressure was bad enough for Super Micro to walked away from some system deals in fiscal Q4, the company said. Revenues were also impacted by a big sale that slipped into the first quarter of fiscal 2013, which began in July.

Tied up with commitments

"The supply and demand issues are in the process of stabilizing," Liang explained, which should make projecting revenues and profits a bit easier. Last month, Super Micro warned Wall Street about its Sandy Bridge too far and disk issues would mean it would not hit its revenue targets of $280m to $310m.

What was not clear at the time (but which was buried in its 10-K financial report to the US Securities and Exchange Commission) is that Super Micro had entered into a $276.3m disk purchase commitment with an unnamed partner that runs through March 2014.

Howard Hideshima, CFO at the company, said that the deal allows for Super Micro to adjust disk pricing on a quarterly basis as the market fluctuates. The company has a total of $438.1m in component purchasing agreements through March 2014, which means disks are a big part of that. Hideshima said that this purchase agreement only covered a portion of the demand that Super Micro has for drives, but he didn't say how big or small that portion was.

In fiscal Q4, Super Micro sold around 62,000 servers, an 8.8 per cent increase over the year-ago quarter. Average selling prices for machines were $2,000, about the same as last quarter and a bit higher than the $1,800 in the June 2011 quarter. System sales (including servers, storage arrays, and switches sold individually as well as full-rack system stacks) accounted for $123m in revenues, up 17 per cent.

SuperBlade blade server sales were up 30 per cent in the quarter, and storage array sales rose by 25 percent as well, according to Liang. The MicroCloud microserver line that debuted a year ago is quickly ramping, and the FatTwin modular machines that the company previewed back in June started shipping this week.

Both machines are based on Intel's "Sandy Bridge" family of chips. Liang said that less than 10 per cent of the company's overall sales were driven by Sandy Bridge products in the fourth quarter, but that in the September and December quarters, Super Micro expected that Sandy Bridge would ramp fast and soon dominate revenues. Interestingly, Liang said that Super Micro spend somewhere between $7m and $8m developing the FatTwin machines, and had a few million more dollars of investment to make as it tweaks the product in coming quarters.

On the components side of the business, where the company sells motherboards, enclosures, service processors, and lots of other gear that whitebox makers use to assemble their own machines for customers, the company shipped 1.17 million subsystems and accessories, a 24 per cent drop compared to the year ago period. System component and accessory revenues were down by $2m to $153m and took hits in the second and third physical quarters thanks mostly to the slow-motion Sandy Bridge Xeon ramp over the past three quarters.

In the quarter, 15.2 per cent of revenues were driven by hyperscale data center operators, down a smidgen from the 15.7 per cent in fiscal Q3, but at $42m in Q4 a bit larger than the $38m it did in Q3. Resellers and distributors drove 53.4 per cent of sales, compared to OEM and direct sales which contributed the other 46.6 per cent. In terms of geography, the United States accounted for 57.4 per cent of Super Micro's revenues in fiscal Q4, and while Europe was down, driving only 22.4 per cent of overall revenues, Hideshima said that there was plenty of opportunity to chase. Asia was 17.5 per cent of the Super Micro pie in the quarter.

Looking ahead, Super Micro is being a bit conservative in guesstimating what will happen in the September quarter, which is traditionally its weakest period. Hideshima said to expect sales of between $270m and $290m, with non-GAAP earnings per share of 18 to 24 cents. That's about 13 per cent revenue growth at the midpoint and about the same profit level on a non-GAAP basis. ®

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