Super Micro Computer Inc

NASDAQ:SMCI

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated First Quarter Fiscal 2020 Business Update Conference Call. The company's news release is 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 and 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 caller 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, SVP, IR]

Good afternoon and thank you for attending Super Micro's business update conference call for the first quarter fiscal 2020, which ended September 30, 2019. During today's conference call, Super Micro will address the company's preliminary financial results for the first quarter of fiscal 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 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 2017 and our other SEC filings. All of those documents are available on the investor relations page at Super Micro's websites. We assume no obligation to update any forward-looking statements.

Most of today's presentation will refer to non-GAAP and natural 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 Liang, Chairman and Chief Executive Officer.

[Charles Liang, Chairman and CEO]

Thank you, Perry, and good afternoon, everyone. Our first quarter revenue will be in the range of $788 million to $798 million, which exceeds midpoint of our quarterly guidance of $780 million. Our non-GAAP gross margin will be in the range of 15.1% to 16.3%. Non-GAAP earnings per share will be in the range of $0.61 to $0.65 compared to the range of $0.66 to $0.70 last year, in 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 impacts revenue. We see continued demand in the channel. We have upgrade of our portfolio and put to market innovation allow our partner to also application optimize solution to their customers.

In addition to seasonality in the September quarter, there were several factors impacting our top line revenue. And overall industry wide slow down due to economic uncertainty, some push in purchasing from major data center customers and price reduction on key components using our systems. As recorded by our peer and industry analysts, server revenue has been down in 2019 and we saw that trend continue for our business in the second quarter.

However, as we reach the end of this quarter, we’ve begun to see signals of stabilization and early sign of seasonal straight from our key customers, as we begun including our inventory to take advantages of the opportunities.

Super Micro has long history that application optimal product will maximize our growth. We continue to develop new products and solutions, hopefully across major server and storage markets, including total solution, AI machine learning, 5G, IoT and data center. Combining the advantages that were introduced to our green computing and resource savings platform, we delivered concrete 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 offering [ph] between hyper converged [indiscernible] continue to be the most optimized solution for new generation solid customer delivery basically in cars feature, support, [indiscernible], NVMe, predictable IO, and high TTP of Intel 2nd Generation Xeon Scalable Processors.

With SAP we delivered the two new four way super servers as part of our Intel Select Solutions, with up to 12 terabytes of memory, that brings the power and cost saving of data center, system memory to the SAP HANA platforms. We cooperate with Nvidia homemade [ph] HGX Edge solution allowing customers to be manage their AI application on Super Micro’s extensive edge GPU product line in cloud native environment. Moreover, we introduced a new class of 5G ready software defined networking platform that can be optimized to deliver accelerated AI differencing to their network page.

On AMD side, we start shipping Super Micro systems based on second generation AP processor, which [indiscernible] our previous generation A Plus system and provide much better performance and value. Last but not least, we have begun to deliver a set of [indiscernible] system product target for mega data centers. These products are uniquely optimized for the specific requirements of high volume scale data center customers.

Our business solution allow us to leverage our existing product designs and customized performance, efficiency and cost requirements on demand. We see a similar opportunity for cloud data centers, optimized design and have therefore underway to deliver additional [indiscernible] to specialized products. Looking ahead, we see the pace of processor refresh cycles accelerating and has repeat our sales with the next level product update in the coming quarters.

[indiscernible] we had keep up developing of our next generation Experia architectures for a complete family refresh. This new architecture we’ll take full advantage for the upcoming innovations of Intel new processors like PCI Gen-4 more flexible IO, higher performance architecture, and new storage form factors. We have already started engaging with selected of our customers.

Important to achieving our stated goals, we continue to innovate 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 [indiscernible] completing path and more at our headquarters [ph].

In summary, although market conditions have been challenging, we continue to deliver significant server and storage innovations to the market. More importantly, we have globalized 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 products and operation improvements, which will empower us to achieve our business goals.

And now, I hand the section over to Kevin.

[Kevin Bauer, SVP and CFO]

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 grow 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 $0.61 to $0.65 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 where 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're now able to report that we had 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 10-Q filing for this first quarter of fiscal 2020.

[Perry Hayes, SVP, IR]

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

[Operator]

Thank you, sir. [Operator Instructions] And we'll go first to Nehal Chokshi of Maxim Group. Please go ahead.

[Nehal Chokshi, Maxim Group]

Yes. Thanks and congratulations on solid results relative to the guidance, especially on the gross margin very nicely done there. On the guidance here, looks like at the midpoint, you're getting to up 5% Q-o-Q. How's that compared to your typical seasonality?

[Kevin Bauer, SVP and CFO]

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.

[Nehal Chokshi, Maxim Group]

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 the impression on a Q-over-Q basis. There has been some pressure yet you did see strong gross margin on Q-over-Q basis. So could you tease that out as far as why did you also see the strong Q-over-Q gross margin?

[Kevin Bauer, SVP and CFO]

Yes, I think we had mentioned last quarter that, as compared to the quarter previous to that that still there were some mix and customer influences that are in there. And certainly that was the case this quarter as it rebounded back. So, we continue to look at that gross margin, trying to ensure that we make some periodic progress overtime that we have talked about the quarters on quarters. But 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 orientation and it will be less of the impact on the sequential basis related to the component changes.

[Nehal Chokshi, Maxim Group]

Understood. Okay. And looks like there was about $2.5 million of incremental OpEx Q-over-Q basis; A, is that correct? B, can you help guide us which buckets we should attribute those to?

[Kevin Bauer, SVP and CFO]

You mean in terms of…

[Nehal Chokshi, Maxim Group]

For the September quarter, yes.

[Kevin Bauer, SVP and CFO]

Yes, 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 affected with our fiscal new year in January 1st. And then, as Charles had mentioned, we have some new product development initiatives that were sequentially increased quarter-over-quarter.

[Nehal Chokshi, Maxim Group]

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

[Operator]

[Operator instructions] Our next question comes from Aaron Rakers of Wells Fargo. Please go ahead.

[Aaron Rakers, Wells Fargo]

Yes, thanks for taking the questions. I want to first just ask you kind of on a demand environment. I know you talked about demand, the demand environment being somewhat challenging. But you also mentioned that you started to see signs of improvement. There has been some kind of mixed data points on some of the hyper scale 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, just any kind of color on what you're seeing as far as purchasing behavior for the customers and particularly some of the hyper scale customers you have?

[Charles Liang, Chairman and CEO]

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

[Kevin Bauer, SVP and CFO]

But I think on the backdrop we reminded you of this a number of times that our exposure to hyper scalars is not nearly as much as some of the other competitors that you may have in mind.

[Aaron Rakers, Wells Fargo]

Okay. 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 the SSD pricing seems to be stabilizing and maybe turning a bit higher. DRAM, however, continues to be on a downward trend, just as you think about the current quarter how would you characterize what you're seeing from a component pricing environment perspective?

[Charles Liang, Chairman and CEO]

Yes, I mean, after many years improvement, our procurement department have been a much stronger than before ever. And also our economical scale help us to not only see NVMe especially SSD prices are getting growing and DRAM price continue slowly dropping. So both I guess about offset the next few months, I believe.

[Aaron Rakers, Wells Fargo]

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

[Charles Liang, Chairman and CEO]

As I just say our AMD platform outperform the previous generation AMD solution allow more Qualcomm, almost double Qualcomm. So performance advantage which we had [indiscernible] 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 Nvidia [ph].

[Aaron Rakers, Wells Fargo]

Okay, thank you. I'll leave the floor. Thanks a lot.

[Charles Liang, Chairman and CEO]

Thank you.

[Operator]

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

[Charles Liang, Chairman and CEO]

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

[Operator]

Thank you, ladies and gentlemen, that does conclude the Super Micro first quarter fiscal 2020 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.