Q4 2019 Earnings Call

We're currently on hold for the Super Micro computer Inc. fourth quarter fiscal 2019 business update conference call. At this time, we are assembling cities audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.

Good day, ladies and gentlemen, thank you for standing by welcome to the Super Micro computer incorporated fourth quarter fiscal 2019 business update conference call. The company's news releases issued earlier today are available from its website at www Dot Super micro Dot 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 184451229 to one and entering replay pin Fivefive 8513 to <unk> International callers should dial 1412317.

6671 with US today are Charles Liang, Chairman and Executive 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 supermarket was business update conference call.

For the fourth quarter fiscal 2019, which ended June Thirtyth 2019.

During today's conference call Super Margo will address the Companys preliminary financial results for the fourth quarter of fiscal 2019, and the company's efforts to become more current with its Manny <unk> SEC filings.

References to any financial results are preliminary and subject to change based on finalize results contained and 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 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, we'll refer to non-GAAP financial results and outlook.

At the end of todays prepared remarks, we will have a Q and a session for sell side analysts to ask questions.

I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you Perry and good afternoon, everyone.

Oh fourth quarter revenue will be in that range and you fly to Andrew sitting on me.

Which you see no mean pulling over I'll put it in guidance and.

Did you say, 15% dog and nasty and 11%.

Good nice quarter.

Hello physically on revenue was approximately three point might be.

And but he didn't increase.

Approximately 4% from last year.

non-GAAP , earning per share within a range of.

57 cents to 61 cents compared to a wide range of say I'd say improved 79, seven last year and a great job put it into 15 to say last quarter.

Jason Liberty was approximately 81% Oh total revenue season is peace well see lower year over year.

Mostly due to the war dealing and then price which impacts Libby.

We launched a comprehensive portfolio of over one anyway.

Game server and storage systems supporting the new you pay on second generation GM scalable processes called me 'cause kidding.

When you put out bring already cool performance and retention improvement to enterprise Crown fried you and then I will close with up to 50% Beta piece you will see strong interest in these new products and not grant over a new products to outpace previous changes.

Because it was a challenging period for the traditionally strong quarter.

Motor title market conditions, we have document trade the tension in some key component price to be downstream impacts our quarterly revenue.

However, the twin it change, including pennies impeccable, meaning minds.

Our strong USA manufacturing presence in Iowa disputed global manufacturing footprint in the USA pay one incident.

We also see post P. has been leased though people about mines, such as between and superbly.

Which achieved higher sales on both quarterly and yearly basis.

Importantly.

We see great opportunity as our long term investment in operation improved internal divisions, and we don't see and the girls over our Q.

Pull down in mind.

As shown on market demand for application optimized high performance Silpada and Mount declined.

On a positive side.

We remain focused on delivering solution based on our new resource saving architectural.

Sure Michael is it unique architectural.

The aggregate.

Major sub systems separating compute.

Outreach ideal power and cooling it should at least those can be defrays overall upgrade independently.

Allowing there nothing that would reduce newpage cycle cost and their impact to the environment by reducing power consumption and waste.

Some components such as you know to keep how to price.

Enclosures and Io devices can be men in the premium for up to 20 on iOS.

Photos saving achieved schools shale, how including as a way to us three including solutions.

On a typical suite for you do pretty cycle Super Mega resource savings there was de lever up towards 30% net hardware cost savings from each new heritage cycle.

We continue to Delever post two marquee products, introducing the first the server and storage systems. This opodo old French as Ed Saudis drive.

This optimized Nvidia drive deliver up to six eggs, mostly pool and up to five weeks into the backstreet over traditional fresh storage.

Which is ideal for the highest performing workload.

All applications requiring.

Hi, Hi, ups, such as autonomous driving.

So two engine mission critical data base.

Okay. Please your intelligence.

It's PC.

Scientific research and loan we believe it will become a men converged storage form factor in the near future.

Full priced you Super micro is committed to providing the most advanced solutions for age.

The motor Michael did nothing and coal network that provides the security priority.

Multiple access edge computing.

Okay opened radio access network.

The need of whole powerful sliver across a wider variety of implementation.

We are only increase we should that continue to grow our own pricing network Super micro edge servers and to transform enterprise and the empowered with intelligent connectivity from our European device to cloud.

Yeah, Hi from age is also met the possible, possibly provide optimized embedded base.

Nvidia GPU collaborating and VGX play from his computing solutions to our customers.

Saving the Peace Corps last let me have a brief preview of our brand new architectures with many innovations for high speed connectivity design.

This new product line I should you know operating that system connectivity families and computing power and competent density.

Two of these new X. It takes projects our code Heiple Rachman and we're entering service.

Early availability is a target of 30 Q1 2010.

In summary, we see tremendous potential opportunity in the enterprise Crown Fiveg in AI that will benefit the home Super Micro's Reso selling solutions.

I'm very confident in the strength of our product hopefully and continued improvement of our operating.

Fundamentals.

Regardless of market cycles.

Hello opinions the mother of first to market design.

That deliver breakthrough innovations in performance divisions and keeps your way to achieve some concept phase.

Moreover, we will continue to invest a mall April in our strategic relationships to build a stronger presence in key markets and targeted vertical customers.

Hi, guys Peg this past year, where resulting continue much share growth and improvement of our financial performance.

And now I will hand, the section hold okay.

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 $845 million.

Our geographies were lower on a year over year basis would be made up approximately 14% lower seasonal 19% lower and the U.S., 14% warmer.

Our estimated range of gross margin on both a GAAP and non-GAAP basis, what's from 14.7% to 14.9%.

Our margins have steadily improved since last year and 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 57 cents to 61 cents per share.

We continue to generate cash and estimate cash generated from operations was approximately $81 million.

After deducting capex of $11 million, we estimate free cash flow of approximately $70 million for the quarter.

On a cumulative basis over the last four quarters, we estimate free cash flow was approximately $259 million.

This quarter, our cash conversion cycle decreased to 91 days.

The decrease was primarily due to a 21 day decrease 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 NIM for audit.

Were now working on fiscal 2019 inclusive of the efforts to finalize revenue under both the six so far and six on Snicks revenue recognition standards.

We will be under a two year engagement with our auditors for both fiscal years 2018, and 2019 that will enable some efficiencies.

The team remains focused on becoming fully trained on our SEC filings.

As indicated previously we will have a Q and a session, which sell side analysts will be permitted to ask 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 following the digit one on your Touchtone telephone we will take your questions in the order that your signal and in the order that you signal and if you've 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 to also.

If you're on a speaker phone. Please make sure that your mute function is disengage. 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 youd like to ask a question.

And we'll go first to.

Mehdi Hosseini from Susquehanna Financial Group. Please go ahead Sir.

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, and a half to 14.7 to 14.9, just wondering what the dynamics were were over there obviously revenue ticked up.

Components prices bright tick down so just wondering if.

What was driving the decline that a follow up.

Sure No problem this is Kevin.

Last quarter, when we highlighted the fact that we were in the mid Fifteens. We cautioned the group that we look like we had a very good quarter in terms of everything aligning up perfectly.

And as we talk to just same question last quarter. We highlighted the fact that we were in the mid Thirty's not too long ago had broached 14.

Towards the mid year of 2019 and were in between 14, and 15 and so we highlighted that as being some steady progress as we went through the through the quarters. So we highlighted that last quarter, you know things lined up very very well. So I don't necessarily think its decline I think that our continued progress.

It is not perfectly linear.

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.

Yes, I mean.

No nothing that is choppy and macro economic that installed however, alis solution outperform auditors as the pace or do we see that has kept a very big pull down nine does all of it.

So we expect our meetings with the continuum.

Gloomy, although maybe not medifast blotching, webby, booming and especially already I mean.

New technology, we have the.

Puts few side floppy.

Yes. This is Kevin I think if we put our lens a little bit shorter in.

In time as we looked at this quarter's guidance certainly we are observing in our 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 for this.

Next quarter.

Got it thanks, and then just last one would 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 out the enterprise efforts services software.

Many fortune 500 accounts, just would love an update there.

Maybe new customer account figures anything there would be helpful. Thank you.

Yes, Barry So, yes, Q2, UK portion of our business, which includes that enterprise section.

It was approximately 20, a little bit better than 20% of the overall revenue.

Within that.

The enterprise section was actually up year over year by about 12%. So we're making steady progress in there with the number of customers that we have and the business that we're doing.

Thank you I'll get back in the queue.

Well take our next question from May have Chuck ski Choksi from Maxim Group. Please go ahead.

Hi, Thanks and.

Congrats on what I think is a fiscal year that represents records on cash from operations a non-GAAP net income.

So you now have a $36 million net cash position, that's 29% of your market cap.

And I based I think on your trailing 12 months.

Midpoint EPS that you've provided for.

The past 12 months looks like you are trading at Fivex, even net income.

So are you guys willing to put a that net cash to work in terms of buybacks once you're able to once you know the 10-K's R&D to up to date.

Yeah, 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.

That 259 million.

Working capital harvesting was roughly about $70 million of that and we know that we're going to meet that soon when we continue to grow again. So I know this is a question that came up last time, we are just going to continue to to plow forward in terms of understanding what our working capital needs are.

As as growth returns, we feel pretty strongly about that.

Okay.

And then Oh, that's great that you've submitted the fiscal year end financials for Finalization by your auditors can you confirm that the submitted financials are within the previously announced revenue and EPS ranges.

Yeah, no I'm not going to be a little that to to confirm that.

Thats not something to address at this moment.

Okay.

I will get back in the queue. Thanks.

And again it is star one if youd like to ask a question. Our next question comes from John Lopez from vertical group. Please go ahead.

Hi, Thanks.

I just had a couple of clarifications first did you guys give us or would you give us the number the service system number please or the percentage of the business that we service systems.

Yeah, we said in the.

Scripted Charles this represents about 81% were with services I'm sorry, the server 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.

Hey, I'm wondering if you can confirm that and then b just any thoughts on how that part of trend.

Obviously, you guys noted 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.

So it was a relatively flattish we talked about the two components that we hope.

No I think as we look forward, we will we have confidence in our long term business needs.

Two investing I don't see that were.

You know large.

Increases in Opex, but more in line with what we think needs to be investments for the future.

Gotcha, Okay helpful.

I was a bit surprised by one of the comments you guys made I apologize if I remember you made it but some version of the Cascade like pacing is ahead of prior generations. I'm wondering if you could just flesh that out a little bit.

Yeah, maybe not entirely consistent with or picking up elsewhere. So I'm wondering if it's specific to your.

Mix Youre skews. So if you guys could just spend a second on that and then in in doing so.

I know, you're not going to give guidance I'm not asking for it but as you think about trending toward the end of the calendar year.

Do you know 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.

Yeah. Thank you I mean, you know we have technology, a leading company. So when there whenever there are new technologies, we have a chance to grow better.

Given the make whole economic.

We have yet to be choppy now coming mines. So we tried to be conservative however, all cascade ache.

Bingo Mediware as basically the new platform.

Include the amount between.

No I have been that but.

And she pro rate.

We said reso's saving their head start to getting on more and more traction.

And Mega destination, you Grayson, yes.

Not yet another tool a new pay to fall within that range and hyper lock them up so although its early stage. We believe in number one and it goes to new technology, We now have all girls Jim integrating.

And if I could just follow up on that.

You make a good point, which is you guys have put a lot of skews out around cascade like it appears as though significantly more on a relative basis and your peers have and so I'm wondering do you would you view Cascade Lake is perhaps an opportunity for maybe like disproportionate share gain.

The cycle of like I.E. or your competitors, perhaps less focused on this.

Excuse me on this integration of ER. This this portion of the Intel platform that you guys are.

Yes, no. That's helpful technology kind that would guess available including like designation as a if and Samsung anyone knows pulled on line can be and again much shale, although they are pretty new technology, but we see a.

Potential.

You mean.

Neither endo data DC up early next year, there will be a big change would be and.

Okay as to Cascade to make you feel it's the bill.

To bill.

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

Thank you.

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

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's it serve as a tailwind to gross margins moving forward.

Well I think the reduction in kind of in component prices. Obviously has has slowed down so we've gone through a pretty steep ramp as we went through the last few quarters.

We're not going to have that same kind of the 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 see that that's going to be.

In state sustained uplift because those prices are our reduction in those prices is flattening out.

And has that altered your decision, making around inventory management as far as memory are you are you strategically adding.

Components.

Given the flattening out.

I would have to say we have been.

A controlled anywhere in DC.

Thank you and then price drop period, so we will convene ammonia, though very closely.

Great and then just a question on storage.

Would you be able to share the growth.

Your next gen storage versus traditional storage and overall storage.

Yes, indeed, as basically our new study form factor any of one is basically I'd say, we have a bunch of the new platform and we have a good evening.

Abella.

In DOSA.

Pull down near you join the need to.

And just lastly, Charles I would love to get your take on what you are seeing in in Hyperscale or Internet datacenter I know that's part of the G 2000, but would love to hear what trends you're seeing amongst your customers there.

Not that it won't be that.

They seem to have been a NYCO why we shall we see you.

We continue to grow our economical scale in Taiwan and also yeah, I'd say the one hour.

Scale continues to grow we would be more competitive to beat those largest scale thats in that and we are we are preparing now.

Thanks very much.

Thank you.

Our next question comes from now how chalk she of Maxim Group. Please go ahead.

Yep.

So I think you stated that you expect to have gained market share during the quarter. So what do you think the market actually took because until data 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 know you guys were up 12% year over year on the enterprise side. So just.

You know maybe give a sense as far as <unk>.

What do you think the market did and what portions of the Intel data Center group, a metric or probably actually most relevant for gauging Super micro performance.

Hey, how you know it's.

Yeah, we don't always track a one to one with what.

With their group does it mean again.

If you look at what they are tracking to and a lot of it be hyper scale et cetera.

And what you know.

Thats.

That's not.

A major.

Part of our business, although we have some customers there.

The enterprise would be a separate sort of group there.

Okay. Thank you, yes, I wouldn't say, although I mean that we saw a economical scale continues to improve we would be a more aggressive in both enterprise and she will scale to get us into.

Got it thank you.

[noise].

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.

Oh. Thank you would you want us to be and I have agreed that they.

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.