Super Micro Computer, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Supermicro Computer Incorporated first quarter fiscal 2020 business update conference call. The company's news releases issued earlier today are available from its website at www.supermicro.com. During the company's presentation, all participants will be in a listen-only mode. Afterwards, securities analysts 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, November 14, 2019. A replay of the call will be accessible until midnight Thursday, November 28, 2019 by dialing 1-844-512-2921 and entering replay PIN 9981371. International callers should dial 1-412-2921 317-6671. With us today are Charles Yang, Chairman and Chief Executive Officer, Kevin Bauer, Senior Vice President and Chief Financial Officer, and Perry Hayes, Senior Vice President, Investor Relations. And now I would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Good afternoon, and thank you for attending Supermicro's Business Update Conference Call for the first quarter fiscal 2020. which ended September 30th, 2019. During today's conference call, Supermicro will address the company's preliminary financial results for the first quarter of fiscal year 2020 and the company's efforts to become current with its remaining SEC filings. References to any financial results are preliminary and subject to change based on finalized results contained in future filings with the SEC. 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. Before we start, I'll remind you that our remarks include forward-looking statements. 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 2017, and our other SEC filings. All of those 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 outlook. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts to ask questions. I'll now turn the call over to Charles Leon, Chairman and Chief Executive Officer.

Thank you, Perry, and good afternoon, everyone. Our first quarter revenue will be in the range of $788 million to $798 million, which exceeds the midpoint of our quarterly guidance of $780 million. Our non-GAAP gross margin will be in the range of 16.1% to 16.3%. Non-GAAP earnings per share were in the range of $0.61 to $0.65 compared to the range of $0.66 to $0.70 last year and the range of $0.57 to $0.61 last quarter. System revenue was approximately 80% of total revenue. System ASPs were lower year over year due to lower memory and SSD pricing, which impact revenue. We see continued demand in the channel where the breadth of our portfolio and force to market innovation allow our partners to offer application-optimized solutions to their customers. In addition to seasonality in the September quarter, There were several factors impacting our top-nine revenue. An overall industry-wide slowdown due to economic uncertainty. Some posts in purchasing from major data center customers and price reductions on key components used in our systems. As reported by our PR and industry analysts, several revenues have been down in And we saw that trend continue for our business in the September quarter. However, as we reached the end of this quarter, we began to see signals of stabilization and early signs of seasonal strength from our key customers. And we began increasing our inventory to take advantage of the opportunities. Simple Micro has long insisted that application-optimized products will maximize our growth. We continue to develop new product and solution offerings across major server and storage markets, including Total Solutions, AI Machine Learning, 5G, IoT, and data centers. Combining the advantages that were introduced to our green computing and resource savings platforms. We delivered complete solution offerings with Red Hat, VMware, NVIDIA, and SAP, providing certified and tested configurations that can reduce risk and accelerate ROI for our customers. Our ultra-high-convert InfoChartra continues to be the most optimized solution for new generation storage customers, delivering the best-in-class feature, support, hard-shockable NVMe, flexible I.O., and high TDP of Intel second-generation Xeon scalable processors. With SAP, we delivered the 2U four-way shipper service As part of our Intel Slack solution, with up to 12 terabytes of memory, that brings the power and cost savings of Intel Data Center's system memory to the SAP HANA platform. We cooperate with NVIDIA on an EGX edge solution, allowing customers to manage their AI applications on Supermicro's extensive edge GPU in a cloud-native environment. Moreover, we introduced a new class of 5G-ready software-defined networking platform that can be optimized to deliver accelerated AI inferencing to the network edge. On A and B side, we start shipping super micro-bit twin systems. based on a second-generation APIC processor, which double the code count of previous generation A-plus systems and provide much better performance and value. Last but not least, we have begun to deliver a set of off-road maps, specialized system products, targets for metadata centers. These products are uniquely optimized for the specific requirements of high-volume-scale data center customers. Our solution allows us to leverage our existing product design and customized performance, efficiency, and cost requirements on demand. We see a similar opportunity for cloud data center optimized design and have A4 on the way to deliver additional off-road map specialized products. Looking ahead, we see the pace of processor refresh cycle accelerating and have rated our sales with the next X11 product update in the coming quarter. Order down the road, we have kicked off developing of our next-generation X12 architectures, for a complete family refresh. These new architectures will take full advantage of the upcoming innovations of Intel new processors, like PCIe Gen 4, more flexible I.O., higher-performance architecture, and new storage form factors. We have already started engaging with selected alpha customers. Important to achieving our current goals, we continue to invest and improve our operational efficiency and scale. Building a stronger global foundation, we have increased our capacity in engineering, manufacturing, operations, and service in our key strategic locations. This includes over 200,000 square feet of new facility space. in our San Jose green computing path, and more at our Netherlands headquarters. In summary, although market conditions have been challenging, we continue to deliver significant server and storage innovations to the market. More importantly, we have mobilized our R&D, sales, and operations to grow the discipline and focus needed to Expand our market share. Fundamentally, we are more confident than ever in the strength of our product and operation improvement, which will empower us to achieve our business goals. And now, I will hand the section over to Ken.

Thank you, Charles. First, I will address the current health of the business. by providing an overview of our financial performance for the first quarter of fiscal 2020. I will then make a few comments about our progress on our SEC filings. As Charles mentioned earlier, we estimate our fiscal first quarter revenue within the range of $788 million to $798 million. Geographies were lower on a year-over-year basis, with EMEA approximately 21% lower, Asia 22% lower, and the U.S. 18% lower. Our estimated gross margin range on a GAAP and non-GAAP basis were from 16 to 16.2% and 16.1 to 16.3%, respectively. Our margins improved from last year and benefited from lower key component costs, as well as favorable customer, geographic, and product mix. Our operating expenses were slightly lower this quarter, due to lower reserves for bad debt offset by the effect of annual salary increases and higher research and development expenses. We estimate our non-GAAP diluted EPS range this quarter was from 61 cents to 65 cents per diluted share. Due to the need to rebuild inventory this quarter for seasonal demand, cash flow generated from operations was lower than recent quarters, at $5.5 million. After deducting for CapEx and investments of $13.3 million, our free cash flow was negative $7.8 million. Our closing cash position was a robust $239 million. This quarter, our cash conversion cycle was 89 days. The day sales outstanding was 43 days, while days payable outstanding was 48 days. with inventory days increasing to 93. Our cash conversion cycle target remains 85 to 90 days. Now let me comment on the progress of our remaining delinquent SEC filings. Last quarter, we reported that we had submitted our fiscal 2018 financials for audit. We are now able to report that we have also completed work on the fiscal 2019 financials under both the 605 and 606 revenue recognition standards and submitted them for audit at the end of September. Concurrent with the financial statement audit, we have continued the testing and assessment of our internal controls over financial reporting. As a result, we have prepared drafts of our SEC filings. The team remains laser-focused on becoming fully current on our SEC filings which also includes the 10Q filing for this first quarter of fiscal 2020.

As indicated previously, we will have an abbreviated Q&A session in which cell site analysts will be permitted to ask questions. Operator, at this time, we're ready for questions.

Thank you, sir. Ladies and gentlemen, our question and answer session will be conducted electronically. To ask a question, firmly press the star key followed by the digit 1 on your touch-tone telephone. We will take your questions in the order that you signal, and if you have found your question has been asked and answered before you could ask it or would like to remove yourself from the queue, please press the star and 2. Also, if you are on a speakerphone, please make sure that your mute function is disengaged so that your signal can reach our equipment. Finally, we ask that you limit yourself to one question and one follow-up until all in the queue have had an opportunity to ask a question. We will then come back to you for your additional questions. Again, that is star one if you'd like to ask a question. And we'll go first to Nahal Chokshi of Maxim Group. Please go ahead.

Yeah, thanks and congratulations on solid results. relative to the guidance, especially on the gross margin. Very nicely done there. On the guidance here, it looks like at the midpoint you're guiding to up 5% QRQ. How does that compare to your typical seasonality?

So in general, we believe that it's similar to our normal seasonality. As Charles outlined, we saw some signs of stabilization and a little bit of growth as we enter into the next quarter, so we believe it's kind of in line.

Okay. And I think you gave the color on why the gross margin was up year over year, and I think one of the elements was component costs declining rapidly and that's certainly true on a year-over-year basis, but I was under impression on a Q-to-Q basis there has been some pressure, yet you did see strong gross margin on a Q-to-Q basis. So could you tease that out as far as why did you also see a strong Q-to-Q gross margin?

Yeah, I think we had mentioned last quarter that, you know, as compared to the quarter previous to that, that still there was some mix in customer influences that are in there. And certainly that was the case this quarter as it rebounded back. So, you know, we continue to look, you know, at that gross margin, trying to ensure that we make some periodic progress over time that we have talked about for quarters on quarters. But, you know, without getting into too specific details, we're really calling out the fact that on a sequential basis, this is really going to be customer and mix demand. and it will be less of the impact on the sequential basis related to the component changes.

Understood. Okay. And it looks like there was about $2.5 million of incremental OPEX on a queue-re-queue basis. A, is that correct? B, can you help guide us which buckets we should attribute those to?

You mean in terms of, yeah.

For the September quarter, yeah.

Yeah, so I called out that the key things in terms of the sequential basis were really that we had less bad debt. And then in addition to that, as we go into the September quarter, our annual merit increases are always effective with our fiscal new year on January 1st. And then, as Charles had mentioned, we had some new product development initiatives that were sequentially increased quarter over quarter.

Okay, I'm going to yield the floor for now. Thank you.

And again, it is Star 1 if you'd like to ask a question. Our next question comes from Aaron Rakers of Wells Fargo. Please go ahead.

Yeah, thanks for taking the questions. You know, I want to first just ask you kind of on a demand environment. I know you talked about, you know, demand, you know, the demand environment being somewhat, you know, challenging, but You also mentioned that you started to see signs of improvement. There's been some kind of mixed data points on some of the hyperscale cloud demand, some suggesting that there might be a push-out in server refresh cycles. I'm just curious of how would you characterize the cadence of your customers as it relates to kind of server refreshes? Do you think that there could be any kind of a pause in front of some of the timing around things like Cooper Lake from Intel or even Ice Lake? you know, just any kind of color on what you're seeing as far as, you know, purchasing behavior for the customers and particularly, you know, some of the hyperscale customers you have?

Yeah, for sure. It's a very dynamic market, and that's why we say new process is getting available. So as a technology-leading company, we have a very strong new product available each month or each quarter. So overall, we feel pretty positive as to the macro market, the whole industry demand. At this moment, we feel it's still kind of hard to predict. But overall, we feel not too bad.

But I think on the back up, we reminded you of this a number of times, that our exposure to hyperscalers is not near as much as some of the other compares that you may have in mind.

Okay, fair enough. And then as my follow-up on the component pricing dynamics, I know just kind of thinking about the progression as you see going forward between DRAM and SSD pricing, there's been some indication that SSD pricing seems to be stabilizing and maybe turning a bit higher. DRAM, however, continues to be on a downward trend. As you think about the current quarter, you know, how would you characterize what you're seeing from a component pricing environment perspective?

Yeah, I mean, after many years of improvement, our procurement department has been much stronger than before ever, and also our economic scale has helped us. As to another way of saying, NVME, and especially SSD, right, prices are getting growing, and billion price continues slowly dropping, right, So both, I guess, about offset in the next few months, I believe.

Okay. I'll flip one final one in. You know, there's obviously, you know, some changes in the competitive landscape from a server CPU perspective. You know, you mentioned in your prepared remarks, you know, the progression with, you know, Roam or the second generation AMD processors. How would you characterize... your ability to maybe leverage, you know, a bit of a changing, you know, competitive landscape in server CPUs. What are you seeing in terms of the demand profile, the appetite for AMD, you know, relative to server CPUs versus, say, Intel?

As I just said, our AMD platform outperforms the previous generation AMD solution a lot, more co-coms. almost double co-con. So performance advantage was sure to help the product line to grow. So we feel pretty positive for AMD product line. As to Intel product line, again, our product line has been stronger than before ever. So we have good feeling for both indeed.

Okay. Thank you. I'll see you before. Thanks a lot. Thank you.

It appears at this time we have no further questions. I'd like to turn the call back over to Mr. Leung for any additional or closing comments.

Thank you for joining us today, and have a great day. See you next time. Bye.

Thank you, ladies and gentlemen. That does conclude the Supermicro First Quarter Fiscal 2020 Business Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you. Thank you.