Super Micro Computer (SMCI) Q4 2018 Earnings Conference Call Transcript

Super Micro Computer (SMCI -23.14%)
Q4 2018 Earnings Conference Call
Aug. 21, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. first-quarter fiscal 2018 business update conference call.

The company's news releases issued earlier today are available from its website at www.supermicro.com. [Operator instructions] As a reminder, this call is being recorded Tuesday, August 21, 2018. A replay of the call will be accessible through midnight Tuesday, September 4, 2018, by dialing 1 (844) 512-2921 and entering replay pin 3269159. International callers should dial 1 (412) 317-6671.

With us today are Charles Liang, 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.

Perry Hayes -- Senior Vice President, Investor Relations

Good afternoon, and thank you for attending Super Micro's business update conference call for the fourth-quarter fiscal 2018, which ended June 30, 2018. During today's conference call, Super Micro will address the current state and the company's efforts to file its delinquent SEC filings, the business and market trends from the fourth fiscal quarter of 2018 and the company's estimated financial results for the fourth quarter and for fiscal-year 2018. 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 two news releases from the company that were distributed at the close of regular trading and are 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 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 form 10-K and our other SEC filings. All of those documents are available from the Investor Relations page of Super Micro'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 outlooks. At the end of today's prepared remarks, we'll have a Q&A session, which sell-side analysts will be permitted to ask questions. I'll now turn the call over to Kevin Bauer, chief financial officer.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Thank you, Perry, and good afternoon. Today is a frustrating day because our very good quarterly results are overshadowed by the news of our filing status. We remain undeterred in our efforts to complete our financial reports. We have worked diligently and deployed significant resources toward completing the 2017 and 2018 financial statements, but are not able to file by the deadline of August 24, 2018.

This was the deadline given to us by the Nasdaq appeal panel when they granted the company an exception to the listing standards requiring timely filing of SEC reports. We have made tremendous progress on this matter, having completed the analysis of specific revenue transactions identified through our Audit Committee's investigation. To date, our cash flows have not been impacted by our findings and no transaction reviewed by the company as part of this processes has involved revenue that could not ultimately be recognized nor have we concluded that a restatement to financial results is necessary. The question you must be asking is why is this matter taking so long.

The answer is that in order to be thorough, we're reviewing transactions near the end of each quarter for similar issues found in the earlier testing, but particularly as it relates to the matching of purchase order and shipping terms to the timing of revenue. As we are a high-volume business, this entails locating documentation that is on-site, archived or at third parties and reviewing thousands of revenue transactions in detail using a structured approach. There are a number of issues. However, let me share an example of an issue that has arisen in our reviews.

We have from time to time offered free shipping to customers, even though terms of our agreements with those customers provided that the customer would arrange for its own shipping company to pick the products up at our factory shipping dock. This practice had the unintended accounting consequences, converting the transaction from an Ex Works transaction to an FOB transaction. If end-of-quarter shipments are adjusted in this way, it can cause the appropriate date for recognizing the revenue for those shipments to slip from one quarter into the next. This is one example of what we're looking for as we review thousands of transactions.

The company believes the revenue recognized for reviewed transactions is valid revenue. The main issue is the quarter in which revenue must be recognized. We have not yet determined whether the magnitude of any timing adjustment will be material to any of our previously filed financial statements. We continue to work diligently to complete the review, assess the impact and complete our financial statements and assessment of internal controls of our financial reporting.

We have engaged KPMG to assist us with our review, and we're also working closely with our independent auditor, Deloitte, to complete the job. We appreciate the efforts of both KPMG and Deloitte. Finally, we're also working closely with the agent of our bank group to inform on the testing process as well as our progress toward completing all the SEC filings. As a result, we expect to continue to have adequate lines of credit to fund the continued growth of the company.

We're not able today to project the date by which we will complete this review and file all our delinquent SEC reports, but we believe that date is not too far in the future. Thankfully, our business remains healthy and has grown during this time as a result of our fourth-quarter reflect. Turning to a brief overview of our financial performance during the fourth quarter of 2018. Super Micro had strong fourth-quarter revenue and net profit.

We estimate fourth-quarter revenue within the range of $986 million to $996 million. It was approximately 39% higher year over year. With this strong quarterly revenue, we achieved the fiscal-year revenue of approximately $3.3 billion. We estimate fourth-quarter non-GAAP fully diluted earnings per share within the range of $0.75 to $0.79.

We grew revenue in all market verticals, with key markets growing significantly year over year. Global 2000 more than tripled year over year. Internet data center more than quintupled year over year. And non-Internet date center grew nearly 50% year over year.

Accelerated computing was up over 90%. Embedded grew 20%. Storage and channel were up 9% and 3%, respectively. On a year-over-year basis, the U.S.

enjoyed the highest growth of 48%, followed by EMEA that grew 28% and Asia Pac that was up 24%. Other regions grew 56%. Our estimated range of gross margin on both the GAAP and non-GAAP basis was from 12.8% to 13%. Our customer mix primarily affected margin this quarter.

We estimate non-GAAP EPS range this quarter was $0.75 to $0.79, which was a record high and almost doubled year over year. For the fourth quarter, we estimate cash generated from operations was $38 million. After deducting CAPEX of $8 million, we estimate free cash flow of $30 million for the fourth quarter. Last quarter, we mentioned our effort to manage our working capital.

This quarter, we reduced our cash conversion cycle to 82 days from 99 days in the prior quarter. We achieved improvements in days sales outstanding due to collections and improved shipment linearity and reduced inventory days by being more precisely timing purchases that was offset by reducing days payable. All in all, our business is strong and we improved performance by working diligently concurrent on filing our financial reports. Let me now turn it over to Charles for his comments.

Charles Liang -- Chairman and Chief Executive Officer

Thank you, Kevin, and good afternoon, everyone. Despite our substantial efforts and progress to complete our SEC filings, I'm very disappointed that we did not meet the filing deadline. Personally, I cannot convey how much pain I feel in this unfortunate development. This, however, does not affect my confidence in Super Micro's strong foundation.

In the meantime, we are achieving record-high revenue and profit and continue to introduce new unparallel product innovation. We are committed to completing our SEC filings as soon as possible and making sure this problem will never happen again. Completion of the audit is the [Inaudible]. We've been investing to further improve our people skill process and tools to meet the highest financial standard and to meet the need of rapid growing USA-based global technology company.

We need to make sure our infrastructure is a strong asset that accelerates our growth and deliver flawless customer experience. The change being made has already improved our business operations. We added new management across the business and financial operations of our company. My enhanced team is aware of industry knowledge and experience in large-scale operations.

We also added a new chief compliance officer and a new vice president of Internal Audit and strengthened our revenue recognition team. Total fees has grown over 31% in the end last year, despite the disruption caused by the continued delay to our 10-K filing. Today, Super Micro's business and product technology leadership has never been stronger. Our fourth-quarter revenue will be in the range of $986 million to $996 million, approximately 39% higher year over year and was a new record high.

With this strong quarterly revenue, Super Micro surpassed $3.3 billion for fiscal 2018. Record revenue and profit are strong indicators over a continued success of our product and market focus. We continue to expand our technology leadership with new products that deliver game-changing performance. Our multiple node BigTwin system saw tremendous uptake from hyperconverged systems and Big Data applications.

For AI machine learning, we have partnered with NVIDIA to fuel the world's most powerful platform that combines shipping Tesla V100 GPUs into a 2-PetaFlop SuperServer. Partnering with Intel is essential. We delivered a new class of high data throughput that is loaded and is starting to put online that can deliver up to one petabyte of high-performance all-flash NVMe storage in a compact 1U system and can deliver up to 18 million IOPs. I'm more confident about our business and technical opportunities than at any time in our 25-year history.

We're thoroughly focused on meeting our obligation for SEC reporting and operating a world-class business. We have many greater things going on at Super Micro, as we continue to put into market our new innovation. The resource-saving technologies are enabling great opportunities for us, especially for the upcoming 5G transition enterprise Global 2000 and AI machine learning. I look forward to sharing more of these exciting opportunities we see in future quarters.

And now I will hand over to Kevin.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

As indicated previously, we'll have a Q&A session with sell-side analysts who'll be permitted to ask questions. I would like to remind you that your questions should be directed to the business update that we have just provided. We may decline to answer questions relating to the Audit Committee investigation or the delayed filing of our 10-K because of pending litigation. Operator, at this time, we are ready for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator instructions] And we'll go first to Nehal Chokshi with Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

Thank you, and really a phenomenal results. But Kevin, as you know, the stock is reacting to late filing and really great color on some of the examples that's going on. You made a statement at the end that you believe that the ability to file these filings is not too far away. But in the second press release today, it does say that there's still significant work to do.

So can you help bridge the delta between the verbal comment and what's in the final -- and what's -- the 8-K?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes. So I think it is true that we still have a substantial amount of work to do. I think what we said in terms of being able to see it in the future is, is that now we are later in the process, we actually have pretty good visibility on what it takes to remain to be able to complete the process. So that's how I would string them together is it's one of better visibility, but there's a still fair amount to do.

Nehal Chokshi -- Maxim Group -- Analyst

OK. So the process that was defined on what needs to be done to review a transaction was established relatively late, relative to when the investigation started about a year ago. Is that fair to say?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Well, certainly, as the results of the investigation came in, we were able to see a little bit more in terms of the processes that we were needing to do. So certainly, it was evolving.

Nehal Chokshi -- Maxim Group -- Analyst

OK. OK. And just to be clear, you said significant transactions left for review, but you've already reviewed hundreds of transactions. So are you only a fraction away through? Are you like 10% to 20% away through? Or you're more like 80%, 90% away through of what needs to be reviewed?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes. We really can't go into that level of detail. What I can share with you is that we've taken the approach of largest transactions and are now going toward smaller transactions.

Nehal Chokshi -- Maxim Group -- Analyst

OK. Understood. So on to the fundamental stuff. At the midpoint for the June quarter, you had 25% q-over-q growth, and that's about 1,000 basis points above your typical seasonality.

And you did see gross margin tick down at the Q-o-Q. So can you parse that between potential drivers of mix component input costs compared to pricing and then an upside lever that all these three should be also offsetting shipment volume as well. So maybe you can also comment on how much of a positive effect of volume would have been if the other three items were held constant?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

That's a lot. So I will tell you that we are certainly aware of the fact that the industry is growing. We are benefiting from that. We are happy with the significant enterprise wins that we are getting.

I will share with you that as I looked at the margin mix, a lot of it had to do with just the quarter-over-quarter mix in terms of some of our customers. So some of that is related to the products that they buy. Others are related to the aggressiveness sometimes that we have on larger deals. So I think that -- those were the two primary factors.

Nehal Chokshi -- Maxim Group -- Analyst

Would you say that the pricing environment has become more competitive relative to a quarter ago?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

I wouldn't say that universally, no.

Nehal Chokshi -- Maxim Group -- Analyst

OK. Thank you. I'll get in back in the line. I do have a lot of more questions, so I do want other people ask questions.

Thank you.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

We'll go next to Aaron Rakers with Wells Fargo.

Jake Wilhelm -- Wells Fargo Securities -- Analyst

Hi, this is Jake Wilhelm on behalf of Aaron Rakers. Congrats on the strong results. I was wondering if you can give me some color on what you're seeing with AMD's traction with their EPYC line.

Charles Liang -- Chairman and Chief Executive Officer

Yes. It is the AMD product and has been getting popular, and we ship kind of much more product than last quarters. So the change should be [Inaudible].

Jake Wilhelm -- Wells Fargo Securities -- Analyst

Thank you. I was also wondering if you could give me some color on Intel's Optane product and the traction you're seeing around that with Intel's 10-nanometer challenges.

Charles Liang -- Chairman and Chief Executive Officer

Yes. We continue to ship Intel Optane technology. Again, likewise, why you know people want a lower latency, kind of higher bandwidth, and Optane technology provides excellent solution in the area. And we have a great product line, one of the earliest player in the market.

As to 10-nanometer technology from Intel, as of this moment, we try to observe, and overall, we feel very optimistic still.

Jake Wilhelm -- Wells Fargo Securities -- Analyst

Great. Thank you so much.

Charles Liang -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator instructions] We'll take a follow-up from Nehal Chokshi with Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

All right. Thank. So your midpoint guidance is down 15% q over q, which is about 1,000, 1,500 points more than what I would consider seasonal. So can you give some color as far as what's [Inaudible] seasonal guidance? Obviously, you did have some incredible q-o-q growth over the past two quarters.

But just wondering is there something more to it than that.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

No. I think our primary view of this quarter is really seasonal. I don't think there is anything unusual as it relates to the guidance. Hopefully, we'll do well.

Charles Liang -- Chairman and Chief Executive Officer

No. We saw guidance $810 million to $870 million, and that will be the -- this quarter, September quarter will be strong quarter basically.

Nehal Chokshi -- Maxim Group -- Analyst

OK. And non-GAAP OPEX plans for September quarter, can you give any color there?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes. We're not giving any guidance other than revenue at the moment.

Nehal Chokshi -- Maxim Group -- Analyst

OK. All right. And are you going to be able to provide some color on the system volumes, system ASP, node volume and node ASP for the June quarter?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

No.

Nehal Chokshi -- Maxim Group -- Analyst

OK. All right. That's it for me then. Thank you.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

We'll go next to Jon Lopez with Vertical Group.

Jon Lopez -- Vertical Group -- Analyst

Hi, thanks. I'm wondering if you could just spend a moment, because it's not really that apparent to me by the wording that you offered in the release. So specifically, you referenced in the second press release the review of hundreds of transactions, and then in the same sentence, the conclusion that you don't believe a restatement is necessary. So I guess, I'm hoping you can expand upon a little bit is what exactly have you found as you've gone through these hundreds of transactions and what are the points of focus? And what in that work has led you to conclude the restatement is not necessary? And then last part of that, what would make you conclude prospectively that one might be necessary?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

So the predominant pattern that we're seeing is that there are ins and outs across the quarter. And so, so far they've kind of netted each other out to a great degree, and that's really what the primary modus operandi is.

Jon Lopez -- Vertical Group -- Analyst

OK. And could you just speak a little bit more to the progression of that analysis over the period that you reference, i.e., fiscal '15 through '17? I mean, is it fairly uniform across these periods? Or do you see more congestion in one period versus another?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes, really can't speak to that. But by virtue of the fact that there's not been significant distortions, it doesn't say that there is a big difference in the pattern.

Jon Lopez -- Vertical Group -- Analyst

OK, understood. The second clarification I was hoping you could offer is, you don't reference fiscal '18 at all, and I understand that's not a period that you've provided SEC filings. But are you reviewing transactions for FY '18 as part of this as well? Or has FY '18 been, for lack of a better term, immunized just based on some of the focus and activities that went into motion when you discovered this issue?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Well, I can share with you that as we've gone through the year and things have come to light from the investigation, we have had our eye on that as it relates to how we have estimated the quarters over '18. So we have incorporated some of that. We still will have to go through the transactions at the end, but we've been improving as you go, so to speak.

Jon Lopez -- Vertical Group -- Analyst

Understood. The next question I had was just your commentary around that credit lines. My recollection, and it's a little foggy -- my recollection is that there was some contingencies tied to the filing of the SEC documents. Can you just revisit that topic quickly? Are there procedures? Or do you have to go through separate processes on the credit side now that this deadline won't be met? And then what would be the time frame over which those would be transitioned to outcomes?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes. So the credit line, the way that it was structured is, is that it was a one-year term. If you remember, we closed this in April. So therefore, it had one-year term or completion of our delinquent filings.

And then upon earlier of one of those dates, we would be able to convert it into Phase 2. That Phase 2 actually allowed for an expanded credit facility. So that's the nature of it.

Charles Liang -- Chairman and Chief Executive Officer

And I repeat our passion for [Inaudible], right?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

That's right.

Jon Lopez -- Vertical Group -- Analyst

No, that's right, but that could change. I mean, your access to credit could change, I suppose. That's driving that. And it sounds like what you're saying is that you still have some amount of duration on that one-year term?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

That's correct.

Jon Lopez -- Vertical Group -- Analyst

OK. And sorry, could you just remind like approximately when does that duration end?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

It's like the third week of April, I believe.

Charles Liang -- Chairman and Chief Executive Officer

2019.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes, 2019.

Jon Lopez -- Vertical Group -- Analyst

OK, understood. And so at that point, if for whatever reason the situation is not resolved, then there would be a separate process you'd have to undertake from that perspective?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes, we're getting a little ahead of ourself.

Jon Lopez -- Vertical Group -- Analyst

OK. Sorry, just a couple of questions on the business real quick, if you wouldn't mind. Can you guys just offer a rough split between what your server systems business did in June relative to the accessories portion of the business -- the subsystems, excuse me?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yes. So our system business was roughly about 84% in the last quarter.

Jon Lopez -- Vertical Group -- Analyst

OK. 84%. And would you expect a material change in the segment splits looking into September?

Charles Liang -- Chairman and Chief Executive Officer

The system business is still continuing to grow stronger.

Jon Lopez -- Vertical Group -- Analyst

I'm sorry. The systems business will continue to outgrow the subsystems business?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

You're talking in months to verticals?

Jon Lopez -- Vertical Group -- Analyst

No, no. I was really just looking at the split between the two affordable systems. You have service systems segment and you have your subsystems business, the other 16%. I'm just asking, as we go into -- from June into September, are you anticipating any kind of sizable shift between those revenue buckets?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

No. It's been a slow increase toward systems, and it would continue to have that kind of movement.

Jon Lopez -- Vertical Group -- Analyst

OK, understood. And sorry, the last question on the gross margin side. I think I heard what you said earlier. I guess, I'm just looking for a little bit more on trajectory.

I mean, you've obviously seen some portions of the component bill of material become a little bit more favorable, your gross margin obviously went the other way. It sounds like that was vertically related. I'm assuming that was hyperscale to an extent. But as we just think about the next several quarters, to the extent that bill of materials buckets continue to trend favorably, is there a reason that you wouldn't expect your gross margins to begin to turn back up toward the mid-13s, low 14s? I mean, I'm not asking to quantify that range.

I'm just saying directionally. Would you expect improvement as the cost side continues to be a bit more favorable?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Modest improvement over time.

Jon Lopez -- Vertical Group -- Analyst

OK. Thanks.

Operator

And it appears at this time, we have no further questions. I would like to turn the call back over to Mr. Liang for any additional or closing comments.

Charles Liang -- Chairman and Chief Executive Officer

Thank you, everyone, for joining us and see you very soon. Thank you. Have a great day.

Operator

[Operator signoff]

Duration: 30 minutes

Call Participants:

Perry Hayes -- Senior Vice President, Investor Relations

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Charles Liang -- Chairman and Chief Executive Officer

Nehal Chokshi -- Maxim Group -- Analyst

Jake Wilhelm -- Wells Fargo Securities -- Analyst

Jon Lopez -- Vertical Group -- Analyst

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