Embiggened x86 servers help Super Micro set revenue records

Profits on the mend after flood-driven disk drive pricing snafu

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Last year was not an easy one for whitebox king Super Micro, which makes a living selling x86 servers as well as the components for those who want to compete with it. But the latest record-breaking revenues and improving profit picture shows the company has overcome its setbacks.

Last fiscal year, the company was hurt when Intel delayed its rollout of the "Sandy Bridge" Xeon E5 processors by about six months into the spring of 2012, and flooding in Thailand caused great damage to disk drive manufacturers and a run on disk drives. First, disk prices went through the roof as everyone sough to get inventories, and some companies overpaid for disks – like Super Micro did – and are now working off those inventories in current machines.

Everything would have no doubt been better if the Xeon E5s had come out in September 2011 and disk drive component plants were not in places that we susceptible to flooding. But we live on Earth, and things go wrong and you deal.

That is precisely what Super Micro has done in the past year. The company has stuck to its server and storage knitting, coping with the issues and taking the financial hits that are unavoidable. It bet on getting to the place where new x86 processors and plenty of disks were in the field in its shiny new boxes aimed at hyperscale Web jobs, big data workloads, and more mundane enterprise applications.

In the second quarter of fiscal 2012 ended in December, Super Micro turned in its highest sales since it was founded in 1993 by Charles Liang, who is still the company's CEO two decades later.

Revenues were up a sharp 16.6 per cent to $291.5 million, bucking a general cooling off in the server market as 2012 came to a close, although fourth quarter server figures from IDC and Gartner are not out yet, and won't be finalized until after the bulk of the IT players report their latest financial results. Higher disk drive prices and an increase in research and development costs boosted Super Micro's expenses considerably, however, and net income was nearly cut in half to $4.9m.

The whitebox server and motherboard businesses are cut-throat and there is little margin for error. Which is why Super Micro has been investing heavily in new server designs in recent years as well as setting up factories in the Netherlands and Taiwan to get it closer to customers in Europe and Asia than it can do from its main San Jose factory.

In the quarter, Super Micro had $126m in server sales and Howard Hideshima, CFO at the company, said in a conference call with Wall Street analysts after the markets closed on Tuesday that the company pushed out around 60,000 completed servers during fiscal Q2, which is 3.2 per cent fewer boxes than it peddled in the same quarter a year ago.

This might be alarming if average selling prices for servers were not growing so fast, hitting around $2,100 a pop in the December quarter and up considerably from the $1,800 a year ago, $1,600 two years ago, and $1,400 three years ago.

Super Micro said on the call that Intel's Xeon E5 chips represented about 27 percent of overall sales (meaning both whole servers and components), and added in its presentation that Xeon E5 parts made up more than half of its Intel-based system sales; presumably the same proportion holds for components, but the company did not say.

The big drivers for growth in the quarter were the FatTwin dense-packed two-socket servers and the MicroCloud microservers, which are both aimed at various hyperscale data center workloads. The preconfigured racks of servers and switches for running disk-heavy Hadoop workloads also drive growth in the second fiscal quarter, and storage arrays sales also helped but are still under 10 per cent of overall sales, according to Hideshima and therefore not broken out separately.

The company does not provide any guidance on how plain vanilla rack and tower servers are doing, but presumably these are also selling well. People have not stopped buying racks and towers.

Large scale internet data center operators accounted for 14.2 per cent of total sales, or $41.4m, in the quarter, nearly double from the $22m that Super Micro got from these customers in the year-ago period. This business is inherently choppy, like the supercomputer business, and for precisely the same reason. A relative few customers place very large orders after intense competitive bidding every once in a while. This business is not necessarily profitable, but it is important.

On the component side of the business, Super Micro shipped 1,086,000 components, up 8.8 per cent from a year ago and driving a total of $165m in revenues in fiscal Q2.

By geography, 53.7 percent of Super Micro's sales came from the United States, with 23 per cent coming from Europe, 20.7 percent coming from Asia, and the remaining 2.6 percent coming from elsewhere. Liang said that sales were up in the US, were down in Asia, and were flat in Europe, and added that the facility in Taiwan was ramping and that he was confident that it can increase its presence and therefore its business over the long haul in Asia by being there.

Looking ahead, Hideshima said the fiscal third quarter is traditionally a weak one for Super Micro, but with momentum behind its Sandy Bridge Xeon E5 ramp as well as for its FatTwin, MicroCloud, and storage products it might not dip quite as much as in past years.

To that end, Hideshima said to expect sales of between $275m to $295m in the third quarter ending in March and for earnings to be in the range of 14¢ to 18¢ per share on a GAAP basis. That is quite a bit better than the 12¢ EPS that Super Micro delivered in the December quarter. ®

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