Super Micro Computer Inc

NASDAQ:SMCI

Earnings Call Transcript 2019-Q4

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Inc. Fourth Quarter Fiscal 2019 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, August 15, 2019. A replay of the call will be accessible until midnight, Thursday, August 29, 2019, by dialing 1-844-512-2921 and entering replay pin 5585132.

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 fourth quarter fiscal 2019, which ended June 30, 2019.

During today's conference call, Super Micro will address the company's preliminary financial results for the fourth quarter of fiscal 2019 and the company’s efforts to become more 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 Form 10-K filing for 2017 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 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 $825 million to $835 million which is the midpoint of our quarterly guidance of $[800] million, it is 15% lower than last quarter and 11% higher than last quarter. Full-year fiscal year revenue was approximately $3.5 billion and represents an increase of approximately 4% from last year.

Non-GAAP earnings per share will be in the range of $0.57 to $0.61 compared to that range of $0.75 to $0.79 last year and the range of $0.48 to $0.52 last quarter. System revenue was approximately 81% of the total revenue. System ASP were a bit lower year-over-year mostly due to lower period and then price which impacts revenue. We launched a comprehensive portfolio of over 100 lean server and storage system supporting a new second-generation Xeon scalable processor called Cascade Lake. The new product bring world record performance and efficiency improvement to enterprise, Cloud, 5G and AI reached up to 50% TCO.

We have seen strong interest in this new product and advance over our new product that outpace previous generation. It was a challenging period for traditional strong quarter. Volatile market conditions end up in trade tension and some key component price reduction impact our quarterly revenues. However, the trade challenge, including tariff impact will minimize our strong U.S. based manufacturing presence and our distributed global manufacturing footprint in the USA, Taiwan and in Netherlands. We also see positive signs with our key product names such as BigTwin and SuperBlade which achieved higher sales on both quarterly and yearly basis.

Importantly, we see great opportunity as our long-term investment in operation and improved internal efficiency and we are in the growth of our product assume the market demand for application optimized high performance driven products and not declined.

On our product side, we remain focused on that delivery solution based on our new resource driven architecture, Super Micro’s unique architecture, this aggregate major sub-systems separating compute, storage, higher power, and reduce those can be differentiated along upgrade independently allowing data centers to reduce different cycle cost and their impact to the environment by reducing power consumption and [e-waste].

Some components such as an opportunity power price encourage us than IoT devices can remain in deploying for up to 20 years. Saving achieved through sheer power including whereas vehicle intrusion.

On the typical three to four years cycle, Super Micro reached, they delivered up to 30% hardware costs each new operating cycle. We continue to deliver positive market products introducing first-based server and storage system that supported EDSFF storage drive. This optimize NVMe drive deliver up to six days mostly and up to five days reduction of which additional storage which is ideal for the highest performance worked for our applications requiring higher apps such as autonomous driving, engine, cloud database, artificial intelligence, HPC, scientific research and more.

We believe EDSFF will become main storage contractor in the near future. For 5G, Super Micro is convenient to providing them most advanced solutions for age, the modern micro data and core networks that provide the security, IoT, multiple access is complete. Open radio access network, the need for powerful server across a wide variety of implementation will only increase which continue to allow the 5G network.

Super Micro H server and who transform enterprise and important this intelligent connectivity from IoT devices to cloud. AI from H also made across as we provide, optimize and validate NVIDIA, CPU collaborating and engineer to our customers. Saving the space for last, let me have a brief review of our trending architectures with many innovations for high speed connectivity design. These new products online as you know assistance connectivity and continue and basic, two of this new exciting projects are called (inaudible) service but at the same time target in Q1, 2010.

In summary, we see tremendous potential opportunity in our enterprise, cloud, 5G and AI that will benefit the Super Micro results that we published. I’m very confident in the strength of our products and continue improvement of our operating fundamentals. Regarding our market cycle, our business model first go to market design that delivers breakthrough innovation in performance efficiency and TCO, we achieve comfort. Moreover we will conveniently invest more effort in our strategic relationships to build a stronger presence in key market and target the vertical customers.

I expect this action will result in continued market share growth and improvement of our financial performance and now I will hand the section over to Kevin.

[Kevin Bauer, SVP & CFO]

Thank you, Charles. First I will address the current health of the business by providing an overview of our financial performance for the fourth quarter of 2019. I will then make a few comments about our progress on our SEC filings. As Charles mentioned earlier, we estimate our fiscal fourth quarter revenue was within the range of $825 million to $835 million. Our geographies were lower on a year-over-year basis with EMEA approximately 14% lower, Asia 19% lower and the U.S. 14% lower.

Our estimated range of gross margin on both the GAAP and non-GAAP basis was 14.7% to 14.9%. Our margins have steadily improved since last year and then benefited from improved customer mix, product mix and better component pricing. Operating expenses were slightly lower this quarter due to lower reserves for bad debt offset by higher sales and marketing expense. We estimate non-GAAP diluted earnings per share range, this quarter was within the range of $0.57 to $0.61 per share. We continue to generate cash and estimate cash generated from operations was approximately $81 million.

After divesting CapEx of $11 million, we estimate free cash flow of approximately $70 million for the quarter. On the cumulative basis over the last four quarters, we estimate free cash flow with approximately $259 million, this quarter our cash conversion cycle decreased to 91 days, the decrease was primarily due to a 21-day increase in inventory days to 92 days.

Actual inventory on a dollar basis declined sequentially. Our cash conversion cycle target remains 85 to 90 days. Now let me comment on our progress on our remaining delinquent SEC filings. We recently completed our work on the fiscal 2018 financials and have submitted them for audit. We're now working on fiscal 2019 inclusive of the efforts, finalized revenue under both the 605 and 606 revenue recognition standard. We will be under a two-year engagement with our auditors for both fiscal years 2018 and 2019 that will enable some efficiency. The team remains focused on becoming fully trained on our SEC filings. As indicated previously, we will have a Q&A session with sell-side analysts will be permitted to ask questions.

[Operator]

Thank you, sir. [Operator Instructions] And we’ll go first to Mehdi Hosseini from Susquehanna Financial Group. Please go ahead sir.

[David Ryzhik, Susquehanna Financial Group]

David Ryzhik for Mehdi, thanks so much for taking the question. Just a quick question on gross margins. I believe they were down from the prior quarter, I guess from around 15.5% to 14.7% to 14.9%. Just wondering what the dynamics were over there. Obviously revenue ticked up, components, prices probably tick down. So just wondering if what was driving the decline and I had a follow-up.

[Kevin Bauer, SVP & CFO]

Sure, no problem. This is Kevin. Last quarter when we highlighted the fact that we were in the mid-15s, we've cautioned the group that we looked like we had a very good quarter in terms of everything aligning up perfectly. And as we talked to this same question last quarter, we highlighted the fact that we were in the mid 13s not too long ago had broached 14 towards the mid-year of 2019 and we're in between 14 and 15 and so we highlighted that as being some steady progress as we went through the quarters. So we highlighted that that last quarter things lined up very, very well. So I don't necessarily think it's declined. I think that our continued progress is not perfectly linear.

[David Ryzhik, Susquehanna Financial Group]

And perhaps maybe you can talk about the overall server pricing environment and maybe provide an overview of just demand trends that you're seeing in the current quarter and what your outlook is moving forward? I appreciate that and then a follow-up.

[Charles Liang, Chairman and CEO]

Yes, I mean as you know the market, this is choppy and macroeconomic that it be soft. However our solution outperform others especially wins to Cascade Lake, very big product name, yes just a bit of it.

So we expect our business will continue improvement although maybe not very fast but achieving revenue is booming and especially in the new technology we have the positive sign for our business.

[Kevin Bauer, SVP & CFO]

Yes, this is Kevin. I think if we put our lens a little bit shorter in time as you know we've looked at this quarter's guidance certainly we are observing and are part of the macro situation that many of our competitors have already voiced out. Usually this quarter is seasonally down and when the macro conditions are like this sometimes visibility is poor. And so we have those three elements that were in our mind as we set guidance to this next quarter.

[David Ryzhik, Susquehanna Financial Group]

Got it, thanks. And then just last one we'd love to get an update on where you are in your enterprise efforts. This is something you've mentioned in the past as far as building up the Enterprise effort services software maybe Fortune 500 accounts just would love an update there maybe new customer account figures anything there would be helpful? Thank you.

[Perry Hayes, SVP, IR]

Yes it’s Perry. So yes, UK portion of our business which includes that enterprise section was approximately 20% little bit better than 20% of the overall revenue. Within that the enterprise section that's up year-over-year by about 12%. So we're making steady progress in there with the number of customers that we have in the business that we're doing.

[David Ryzhik, Susquehanna Financial Group]

Thank you, I'll get back in the queue.

[Operator]

We'll take our next question from Nehal Chokshi from Maxim Group. Please go ahead.

[Nehal Chokshi, Maxim Group]

Thanks and congrats on what I think is a fiscal year that represents records on cash from operations and non-GAAP net income. So you now have a $36 million net cash position. That's 29% of your market cap. And yes, I think on your trailing 12-month midpoint EPS that you've provided for the past 12 months looks like you're trading at 5x even net income.

So are you guys willing to put that net cash to work in terms of buybacks once you're able to i.e. once the 10-Ks are indeed up to date?

[Perry Hayes, SVP, IR]

Yes, I think if you look at the cash that we have now certainly we have harvested some of that from the balance sheet. I think roughly I've got $259 million working capital harvesting with roughly about $70 million of that and we know that we're going to leave that soon and we continue to grow again. So I know this is a question that came up last time, we are just going to continue to plot forward in terms of understanding what our working capital needs are as growth returns. We feel pretty strongly about that.

[Nehal Chokshi, Maxim Group]

Okay. And then that's great that you've estimated the fiscal year 2018 financials for finalization by your auditors. Can you confirm that the submitted financials are within the previously announced revenue and EPS ranges?

[Kevin Bauer, SVP & CFO]

No, I'm not going to be able to confirm that. That's not something that I addressed at this moment.

[Nehal Chokshi, Maxim Group]

Okay. I will get back in the queue. Thanks.

[Operator]

[Operator Instructions] Our next question comes from Jon Lopez of Vertical Group. Please go ahead.

[Jon Lopez, Vertical Group]

Hi, thanks. I’ve got a couple of clarifications first did you guys give us rather would you give us the number, the service system number please as a percentage of the business that was service systems?

[Charles Liang, Chairman and CEO]

Yes, we said in the script -- it's Charles script that was about 81% was services, I'm sorry servers.

[Jon Lopez, Vertical Group]

81? Okay 81, I’m sorry I missed that thanks. My second question we don't really have all the moving pieces I guess but it looks like OpEx was kind of flattish sequentially. A, I’m wondering if you can confirm that and then B just any thoughts on how that ought to trend obviously you guys know that the environment's not terrific right now. So I’m wondering if you guys are doing anything proactive for the balance of the year on the OpEx side?

[Charles Liang, Chairman and CEO]

So it was relatively flattish. We talked about the two components that wiggled. I think as we look forward, we will you know we have confidence in our long-term business -- to investment. I don't see that would have large increases in OpEx for in line with what we think needs to be investment for the future.

[Jon Lopez, Vertical Group]

Got you. Okay, helpful. I was a bit surprised by one of the comments you guys made I apologize, can’t remember who made it but some version of the Cascade Lake pacing is ahead of prior generations. I’m wondering if you could just flush that out a little bit maybe not entirely consistent with we're picking up elsewhere, so I'm wondering if it's specific to your, mix your SKUs. So if you guys could just spend a second on that and then in doing so, I know you're not going to give guidance on that, I’m not asking for it but as you think about trending toward the end of the calendar year. Any thoughts on just seasonality and how applicable that may be given the environment and given what you're seeing with the Cascade Lake based projects? Thanks.

[Charles Liang, Chairman and CEO]

Yes, thank you. I mean as you know we are technology leading company. So one-day, everyday a new technology, we had chance to grow better. Given the macroeconomic [inaudible] choppy in coming months. So we tried to be conservative. However, our Cascade Lake I think [has grown] very well especially the new platform including BigTwin, there had been continued growing (inaudible) retail savings, they start to get more and more attraction and like I just mentioned the recent results launched another tool, new platform including [inaudible]. So although it is in early stage, we believe in [inaudible] those new technologies, we have our growth [inaudible].

[Jon Lopez, Vertical Group]

If I could just follow-up on that, you make a good point which is you guys have put a lot of SKUs out around Cascade Lake, it appears as though significantly more in relative basis than your peers have and so I’m wondering do you -- would you view Cascade Lake as perhaps an opportunity for maybe like disproportionate share gain with cycle like i.e. are your competitors perhaps less focused on this excuse me on this iteration or this portion of the Intel platform than you guys are?

[Charles Liang, Chairman and CEO]

As you know there are lots of technology, kinds of ideas available including I just mentioned EDSFF and Samsung the [N81], those product line continue to gain market share. Although they are pretty new technology, but we see a [inaudible] data this year or early next year is where [inaudible] growth.

[Jon Lopez, Vertical Group]

That's great. Thanks very much, I appreciate it.

[Charles Liang, Chairman and CEO]

Thank you.

[Operator]

Our next question comes from Mehdi Hosseini of Susquehanna Financial Group. Please go ahead.

[David Ryzhik, Susquehanna Financial Group]

Hi, David Ryzhik for Mehdi again. Thanks for taking the follow-up. Just back to gross margins, I guess moving forward with lower component prices. Should we expect that to serve as a tailwind to gross margins moving forward?

[Kevin Bauer, SVP & CFO]

Well, I think the reduction in kind of price obviously has slowed down but we've gone through a pretty steep ramp that we went through the last few quarters. We're not going to have that same kind of ramp on a go forward basis. So I think in terms of it helping us as one of the components in terms of improving our gross margins, I don't think that that's going to be in the same sustained uplift because those prices are the reduction in those prices is flattening out.

[David Ryzhik, Susquehanna Financial Group]

Has that altered your decision making around inventory management as far as memory? Are you strategically adding components given the flattening out?

[Charles Liang, Chairman and CEO]

I will have to say we have been controlled everywhere in this DRAM and then price drop periods. So we will continue to monitor very closely.

[David Ryzhik, Susquehanna Financial Group]

Great, and then just a question on storage. Would you be able to share the growth in NextGen storage versus traditional storage and overall storage?

[Charles Liang, Chairman and CEO]

Yes indeed. As basically our new storage form factor and any one is basically like EDSFF. We have plenty of new platform and we have a [good feeling] about in [inaudible].

[David Ryzhik, Susquehanna Financial Group]

And just lastly Charles would love to get your take on what you're seeing in hyperscale or internet data center, I know that's part of the G2000 but would love to hear what trends you're seeing amongst your customers there?

[Charles Liang, Chairman and CEO]

[inaudible] while we share with you, we continue to grow our economical scale in Taiwan and also in USA. So when our scale continues to grow in US we will be more competitive to beat those larger scale data centers. And we are preparing now.

[David Ryzhik, Susquehanna Financial Group]

Thanks very much.

[Charles Liang, Chairman and CEO]

Thank you.

[Operator]

Our next question comes from Nehal Chokshi of Maxim Group. Please go ahead.

[Nehal Chokshi, Maxim Group]

Yes, so I think you stated that you expected to have gained market share during the quarter. So what do you think the market actually did because Intel data center group revenue was down 10% year-over-year about but their enterprise and government was down 31% year-over-year and you just said that you guys were up 12% year-over-year on the enterprise side. So just maybe give us a sense as far as what you think the market did and what portions of that Intel data center group metric are probably actually most relevant for gauging Super Micro performance?

[Charles Liang, Chairman and CEO]

Nehal, we don't always track a one-to-one request what their group does. And then again if you look at what they're tracking to and lot of it would be hyperscale et cetera and what that's not a major part of our business although we have some customers there. At the enterprise would be a separate sort of group there.

[Nehal Chokshi, Maxim Group]

Okay, thank you.

[Charles Liang, Chairman and CEO]

What I would say overall I mean we follow economics with scale compared to those, we would be more aggressively in both enterprise and super scale data centers.

[Nehal Chokshi, Maxim Group]

Got it, thank you.

[Operator]

It appears at this time that 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.

[Operator]

Thank you, ladies and gentlemen. That does conclude the Super Micro fourth quarter fiscal 2019 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.