Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer, Incorporated Second 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, February 14, 2019.

A replay of the call will be accessible until midnight, Thursday, February 28, 2019, by dialing 1-844-512-2921 and entering the replay pin 3700139. 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..

Good afternoon, and thank you for attending Super Micro’s business update conference call for the second quarter fiscal 2019, which ended December 31, 2018.

During today’s conference call, Super Micro will address the Company’s efforts to become current with its SEC filings, the business and market trends from the second fiscal quarter of 2019 as well as the Company’s preliminary financial results for the second quarter of fiscal 2019.

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.

There was a slight delay with the posting of our 8-K on our website, which was filed earlier today. We understand the delay is due to heavy volume at the SEC. 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 and our 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 will have a question-and-answer session with sell-side analysts. I’ll now turn the call over to Charles Liang, Chairman and Chief Executive Officer..

Thank you, Perry, and good afternoon, everyone. Let me first of call comment briefly on our second quarter performance. Our second quarter revenue will be in the range of $915 million to $925 million, which surpass our quarterly guidance and represents approximately 9% year-over-year growth. It is our 10th consecutive quarter of year-over-year growth.

Our growth momentum in three market segments continue with gain in Global 2000 Enterprise, Storage and desperately the Computing. Computer system revenue was approximately 82% of total revenue, up 16% year-over-year, driven by higher ASP growth continued.

We’re pleased to the growth – continue the growth of our business this quarter both in the Data Center and the age despite a macroeconomic challenges. Super Micro is rare producing to drive continue on the revenue growth and win market share as we did this fiscal quarter.

Our fiscal year today total revenue approximately 23% ahead of last year, in line with our traditional growth trend. Our Global 2000 business continued to show strong performance with 16% growth year-over-year.

Our Global 2000 business utilized a entire Super Micro Computer encompass in compute, storage, accelerating the computing, networking, managing this ROI and service. Last quarter, our achievable rate, which is grew significantly and how our Twin Family grew 28% year-over-year, substantially supported by our midstream products.

We’re consistently trends in our management ROI and service opening to provide additional value and revenue based through our customer total life cycle.

I would like to remains top quality, our resource saving system, which is ability to deliver superior total cost of ownership TCO along with the use environmental impact will have significant interest with the private companies.

We continue to invest in our resource saving solution improving this aggregate system and research and development on Pentium lifecycle in closures past type and ROI subsystem. This technology we have our customers stays on both hardware and on the cost, where reduce IT with which lower our total cost improve environment TCE in their data.

Storage grew 24% over last year, comprising approximately 26% of total revenue. Our Petascale remain of full-fledged NVMe only storage service delivered a industry-best performance in latency, higher and bandwidth according to next generation based technology such as U.2, Samsung NF1, Intel Ruler and EDSFF, form factor SSD.

Super Micro enables the software defined storage market with optimized high performance storage systems, unlike other competitors who offer higher cost with proprietary over hedge. We are excited to see many industry leaders adopted this new over hedge technology offering a real time to value advantage to their next generation roadmap.

In machine learning and artificial intelligence, we see a strong growth accelerated computing applications, continue to grow, and making new possibility in both the marketing detail and scientific verticals.

We also manage additional optimized market for GPU system in numerous phone tech designed to accelerated data center capability and cloud computing and [indiscernible]. Super Micro’s new NVIDIA HGX-2 with SuperSever supporting NVIDIA Tesla V100 GPUs with over 80,000 core delivering a niche performance of up to 2PetaFlop for AI and machine learning.

Looking ahead to new engineering developments and growth opportunities. Last quarter, we begin seeding the upcoming future generation Intel Xeon Scalable processors to key customers, that we begin later in the quarter. We launched 30 programs for those new Scalable processor along with Octane PC for system memory.

We have received very positive initial reaction from customer field and we anticipate the upcoming server replace cycle, we are prepared for the revenue growth for Super Micro in the upcoming quarter. As the market moves to 5G, Super Micro is uniquely positioned to address solution from [indiscernible] to the cloud.

We expanded our selection of compact IoT service solution to address a wider range of verticals including networking, communications, security and industry automation operates with wide new module, network edge prefer, of course up to 36 network calls, and it is used for network function virtualization and totally defined networking SDA.

There’s a put on market below CPU cut and market below LPGN within AI and accelerated computing to 5G. In summary, we achieved an important milestone this year, delivering 10% order wise in systems according to industry reporting.

We will continue to gain next year with our resource-saving acknowledge to save cost of hardware producing cost, while improving their overall TCO and TCE. With our U.S.

headquarters and the manufacturing and global scale, we are uniquely position to gain optimized design and competitive – our faster growing and large system verticals such as cloud, AI and 5G.

We are also focusing on hardware technology decision for both compute, the new second generation Intel Scalable processor and storage including NF1, Ruler and EDSFF. [indiscernible] large scale design win. This momentum will prepare Super Micro to power growth of it’s large scale in 2019. And now, I will hand the section over to Kevin..

Thank you, Charles. First I will address the current health of the business by providing an overview of our financial performance for the second quarter of 2019. I will then make a few comments about our progress on our SEC filing.

As Charles mentioned earlier, we estimate our fiscal second quarter revenue within the range of $915 million to $925 million. With that results, we have exceeded our revenue guidance range over my tenure for the past three quarters.

Our customers continue to grow their business with us and drive digital transformation using Super Micro’s cloud and edge portfolio. On a year-over-year basis, you may enjoy the highest growth approximately 28% followed by the U.S., which grew approximately 11% offset by a decline in Asia-Pac of approximately 11%. Other regions grew approximately 23%.

Our estimated range of gross margin on both the GAAP and non-GAAP basis was from 13.9% to 14.1%. Our margin benefited from improved customer mix, partially due to lower sales to Asia and lower provision for excess and obsolete inventory.

Operating expenses were higher this quarter related to product development materials, employee bonuses, audit fee and a provision for a bad debt. We estimate non-GAAP diluted earnings per share this quarter within the range of $0.57 to $0.61. We continue to generate cash and estimate cash generated from operations was approximately $42 million.

After deducting CapEx of $4 million, we estimate free cash flow of approximately $38 million for the quarter. On a cumulative basis over the last three quarters, we estimate free cash flow was approximately $114 million. That has allowed us to pay down our loan, and reach positive cash position.

This quarter, our cash conversion cycle increased to 96 days from 92 days in their prior quarter. Day sales outstanding decreased slightly, while inventory days increased. Our near term target remain from 85 to 90 days. We are guiding net sales for the third quarter in the range of $800 million to $860 million.

We are announcing normal business trends in every fields from sizable business renewals that existing customer. We believe we are back to business as usual. Now let’s turn into progress we are making on our fiscal 2017 10-K.

If you recall, we concluded last quarter that restating prior periods was necessary, as we announced in our current report on Form 8-K filed November 15, 2018. Since then we have worked diligently and the company has achieved significant milestone in this process.

We deliver a draft of the fiscal 2017 10-K with restating financial statements from 2015 and 2016 to our independent auditors in late January. They are reviewing the draft 10-K and are working to complete their integrated audit.

As a result of our conclusions, our independent auditors continue to perform more testing of our accounting analyzes and internal control assessment. We are working closely each day with our independent auditors to complete the remaining audit procedures.

Our internal audit team is developing a prioritized remediation roadmap to address the material weaknesses from our internal control assessments. We continue our procedures on fiscal 2018 financials in parallel and are making solid progress. So to close, we remain laser focused on resolving our SEC filings.

We continue to build industry-leading technology solutions for a data hungry world. We’re excited for the rest of 2019 and beyond. As indicated previously, we will have a Q&A session, which sell-side analysts will be permitted to ask questions.

I would like to remind you that your question 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’re ready for questions..

Thank you. Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. [Operator Instructions] And we’ll first go to Mehdi Hosseini with Susquehanna Financial Group..

Thanks so much. This is David Ryzhik for Mehdi. Just a few, if I could, Charles maybe – would you be able to give us an update on the macro environment, demand across regions, and what you’re seeing in the current quarter? And maybe you can talk about what drove the EMEA strength and then I had few follow-ups..

Yes. Thank you for the question. Yes. We did observed macroeconomic and it will be choppy and we believe we have add weaker than last year. However, we saw new fallback have been very, very strong, get Cascade Lake in storage and other platform. So we believe this year, I mean, at 2019, we happy to see our growing year in term of our market share.

And we are carefully observed the change in Cascade Lake. And our memory price travel well everything is under careful control from Supermicro point of view..

And one of the larger enterprise storage vendors, on its earnings call yesterday had noted some weakness with large enterprise companies in the U.S., elongated purchasing decisions, more scrutiny around buying systems. Have you seen this as well? I was just curious..

Yes. From our point of view, I mean, March quarter had been very deteriorate result quarter over in the history. Well, this year, we can feel so far so good. We see all our change is – we feel really positive to us..

And on the last update call in November, you had noted that you were beginning to see some demand return from customers that initially paused after the Bloomberg article.

Has this continued? have you seen an improvement from customers that initially had made a pause?.

Yes. We see the improvement and the business is going down, put it in normal and positive from our cutting the fee..

Great. And then just on Cascade Lake, just wondering what your expectations are.

I guess from a calendar year 2019 perspective, when does this start ramping for Super Micro from a revenue perspective? And you made some interesting comments around Optane DC persistent memory, would love your opinion on how material this could be in this cycle or do you think that it really ramps in subsequent server cycles? Thank you..

Yes. thank you.

We believe what Cascade Lake would be a big change for Super Micro? Although we’ve started shipping our central recently now would this be not interest from customer side, because that would be the performance and as toward DC persistent memory, it’s a good way on the niche market and we have some customer really interest for those applications kind of large database and kind of a big data kind of application.

We did see some customer meeting in case in that area..

And what drove the high ASP per compute node?.

More and more customer buy or compete with the solution, not really including or a hardware and some management sort of layout. So, because higher percentage of – much higher percentage of computer system instead of platform not to our ASP would continue to grow.

And also more people move to a price, especially NVMe that also grow our ASP and this trend will continue for 2019 after this..

Great. Thanks so much. I’ll get back in the queue..

Thank you..

Our next question comes from Nehal Chokshi with Maxim Group..

Yes, thank you. And congrats on strong results, strong guidance.

Difference between systems and components, did you give that, if not, can you?.

We did not, but the second – systems were 82%..

82%. Great.

And just to be clear, were you saying that this guidance reflects a normal seasonality or not?.

Well, certainly, it’s normal seasonality, but as we had said last quarter, we are cognizant of the macros that are out there. And so therefore we’ve tried to factor that into our thinking. We also know that customers are trying to determine, if they go for the next technology recycle or not, so that could pause their decisions a little bit.

And then lastly, certainly, there are some components that are declining in value and customers’ time, their purchases sometimes around that. So those are the kinds of the themes that we thought..

Yes, talking about Intel, new CPU, Cascade Lake Zen [ph] with our about April timeframe..

Okay. Got it. And then historically Super Micro has had four to six quarters of 20% plus year-over-year growth. You guys just did that from; I think beginning of 2017 to September of 2018.

And then you have sub-20% year-over-year growth and it looks like we’re looking at two quarters of that being the case, it all averages out to 20% to a 20% CAGR over what the past 12 years, which is incredible.

But well, why shouldn’t we believe we are at the beginning of a digestion period at this point here?.

Yes.

Again, this quarter, I mean on the March quarter, I guess about two major impacts, one is on memory price in fresh NVMe price drop, now as you’re aware lower Aspeed that it will beat and also sort marcoeconomic and process cascade won’t be ready then perhaps until April or May, that’s what we try to be conservative with this quarter, March quarter..

Okay. All right.

And then, let’s look at non-GAAP OpEx was up about $6 million versus Q2, it is some expenses, Kevin done not too sure if that was included a non-GAAP OpEx or not, but can you just give it a little bit more color around that Q2 uptick?.

Yes. So, I had mentioned in the call that there were expenses related to certainly our engineers, developing first products for Cascade Lake. And so that was one element of them pulling materials for that. I mentioned that we had employee bonus this year and we have this quarter rather.

And we did have something unusual for the company and that we did have a reserve for credit loss, which doesn’t happen very often..

And what was your reason for apparent loss?.

Just a customer having problems..

Got you. Okay.

And thoughts on how this OpEx should trend and also gross margin should trend for the march quarter?.

Yes. So certainly, the gross margin for this quarter was quite an uptick as compared to what we’ve had historically, most recently as you remember, I called about that we had customer mix that went into our favor as well as we did have a pretty good excess inventory quarter.

I’m not sure that EN always going to repeat over the course of time, but do you remember that what I’ve said is that we would be trying to work on gross margin at a modest pace over time.

So, this quarter, we certainly had a good one, but in the trends, we’re trying to improve modestly over roughly about 13.5% that we’ve been at for a period of time..

Thank you very much..

[Operator Instructions].

Operator, I think there’s one more question on the queue..

Yes. We’ll take our follow-up question from Mehdi Hosseini with Susquehanna Financial Group..

Hi, thanks. David Ryzhik kicking in for Mehdi. thanks for the follow-up. Kevin, you didn’t note lower memory pricing as a reason for the strength in gross margins.

Was memory a benefit to gross margins in the quarter?.

As I said earlier, it’s really customer mix. Since I’ve gotten here, we’ve done a little bit more in terms of looking at our gross margin mix by customer and our portfolio. So, we want to be cognizant of the fact of where we have margin for customers, kind of like in a banding way.

And so that allows us from time-to-time, when we want to bid to win business, we do it in the context of the entire portfolio. And so, I think it’s just really looking at our customer mix a little bit more sharply, not necessarily a significant impact from memory in the December quarter..

And any reason for the tick-up in inventory days?.

Yes. We made some purchases at quarter-end that we thought were advantageous..

Great. And I was just curious on the storage and overall storage; I believe I heard 20% growth year-over-year.

Any sense on, maybe the breakout within that of traditional versus NexGen?.

I guess both of our traditional and new generation, we’re able to grow with most of our new generation especially SSD NVMe based, we believe, it will be much higher pressure to grow..

Yes. traditional came down a little bit and NexGen grew handsomely..

Okay, great.

Any color around what drove that, that growth in NexGen?.

NexGen as you know, I mean, we are the fourth company to delivers order with new form factor memory to the market as U.2, Ruler, NF1 on Samsung and EDSFF exactly the market leader and that kind of go to customer have very good response..

I think in addition to that we’ve been talking about G2000 customers and as we have now left year, some of those G2000 customers have, we have an appreciably stronger business with them then we did 12 months ago..

Great.

And what percentage of overall revenue is G2000 is – I think in the past, you’ve maybe called it enterprise, but what percent of revenue is that driving?.

Yes. we’re probably not going to break that out right now..

Okay. Okay.

And then last one, IDC, what percentage of overall revenue was that and have you seen any wins with new customers in the IDC space?.

David, this is Perry. So, G2K that we talk about is a combination of both the IDC group that we used to talk about. And it also includes the enterprise group that we’re now talking about. So they’re actually gathering what Kevin’s already provided..

understood, understood. Thanks so much. I really appreciate the follow-ups. Thanks..

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

Thank you everyone for joining us today, and have a great day. Thank you..

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