Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer Incorporated SEC Filings 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 Friday, December 20th, 2019. A replay of the call will be accessible until midnight on Friday, January 3rd, 2020, by dialing 1-844-512-2921 and entering replay pin 6731615. 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.
Now I'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.
Good morning, and thank you for attending Supermicro's update conference call to discuss the company's recent filing of its comprehensive Super 10-K for its 2019 fiscal year ending June 30th, 2019. During today's conference call, Supermicro will address its recent SEC filings and our efforts to file the last outstanding SEC document required for relisting, our Q1 fiscal 2020 10-Q. At this point, with over 10 days left in our fiscal Q2 ending December 31st, we will not be updating our second quarter outlook. By now, you should have received a copy of the news releases and supporting materials that the company distributed after the close of regular trading yesterday and that are available on the company's website.
These materials include a slide that highlights key information related to yesterday's filings, an Excel spreadsheet, quarterly GAAP and non-GAAP financial information, and non-GAAP reconciliation, and a PDF of the same information. Before we start, I'll remind you that our remarks may include forward-looking statements. There are a number of risk factors that could cause Supermicro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier yesterday and in our most recent 10-K filed yesterday. All of those documents are available from the investor relations page of Supermicro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results. The end of today's prepared remarks, we'll have a Q&A session during which sell-side analysts will be permitted to ask questions.
I'll now turn the call over to Charles Liang, our Chairman and Chief Executive Officer.
Thank you, Perry, and good morning, everyone. Today marks another significant milestone for Supermicro. I'm pleased to report we have successfully filed our annual and quarterly filings through fiscal year 2019. These filings reflect the extensive and continual enhancement of our internal control over financial reporting. These efforts, including appointing a slate of new leadership over the past three years to help us manage through these challenges and build a stronger process required for continued growth. We continue to provide our customers with leading solutions for enterprise, cloud, artificial intelligence, machine learning, 5G, and edge, while maintaining healthy financial results and a healthy balance sheet. Since our founding in the heart of Silicon Valley 30 years ago, we have driven an unbroken string of year-over-year revenue growth, continuing even during these past two difficult years.
In the past decade have achieved an organic compound annual growth rate of over 20%. Our company continues to demonstrate to the world that high-quality technological systems can be both environmentally responsible and economic, reducing both your cost and your impact on Mother Earth. We developed a total cost to environment, TCE, concept to help IT professionals understand the energy efficiency of their systems and overall impact on the environment. We also offer a Resource-Saving Architecture to help customers save both energy and hardware acquisition costs while reducing IT waste and environmental impact. As we emerge from this challenging period, I am grateful for our steadfast customers, committed employees, and investors. I look forward to leading Super Micro to even greater growth and profitability.
In the year ahead, we believe that strong long-term market demand drivers, application-optimized cloud, and IoT products and our team will write a new and exciting chapter in Supermicro's history. Now, I will hand over to Kevin Bauer, our Chief Financial Officer.
Thank you, Charles. Before beginning the Q&A session, I'd like to make a few key points as highlighted in the slides that can be found on the investor relations portion of our company's website. First, we have filed a comprehensive 10-K covering both 2018 and 2019 results. We additionally have filed the 10-Qs associated with the first three quarters of fiscal 2019. We are not filing a separate 10-K for fiscal 2018 or the 10-Qs for any of the 2018 fiscal quarters. Second, we have shown in two separate charts how our audited financial results compare to the estimated results we shared on a quarterly update call over the last two years. Third, with the filing of our 10-K, we now only need to file our fiscal first quarter 2020 to be current with the annual and quarterly SEC report, which is a prerequisite for applying for relisting on Nasdaq.
We expect that the 10-K will be filed soon. We have already applied to Nasdaq for relisting, and we expect that Nasdaq will focus on our application. Lastly, we currently plan to hold our conference call on our second quarter earnings in the first week of February. To wrap up, as I indicated earlier, we'll now have a Q&A session with sell-side analysts. Perry?
Thanks, Kevin. We ask that participants in today's question-and-answer session constrain their questions to those relating to our recent filings. We may decline to answer questions relating to recent business trends, and we will not provide any further detail regarding when we will file our fiscal Q1 10-Q. Operator, at this time, we're ready for 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 followed by the digit 1 on your touch-tone telephone. We will take your questions in the order that you signal, and if you find that your question has been asked and answered before you could ask it or would like to remove yourself from the queue, just press star 2. If you are using a speakerphone, please make sure that your mute function is disengaged so that your signal can reach our equipment. We ask that you limit yourself to one question and one follow-up until all in the queue have been asked and had an opportunity to ask a question. We will come back to you for additional questions.
Again, that is star one if you'd like to ask a question. We'll pause for just a moment. We'll take our first question from Nehal Chokshi with Maxim Group.
Yeah. Thank you, and congrats on getting all the filings done except for the last one to go. Great job. It's really fantastic to see that. In the auditor letter, it did say that the internal controls that have been placed, there hasn't been enough time to judge whether or not they have been effective. Could you just review what does that really mean there?
Yeah, sure, Nehal. This is Kevin. Certainly, as we have gone through the preparation of the financial statements, we've put in new controls over the course of time. Therefore, they are operating, and we use them as we prepare these financials. The process that you have to go through to be able to say that you've fully remediated in internal controls is that you need to design them, they need to be operating for a period of time, the company needs to test them, and then the audit firm does that same work. They would be observing how the new controls have been designed, and then depending upon the frequency of control, it takes a certain amount of time to prove out to show that it is working effectively.
If you were to look in the Item 9A, you would see quite a number of things that we've done over the course of time that are operating that way. I think the key is that we've designed a lot and we're working a lot. We just need some more cycles of performance to be able to declare victory. That will take some time.
In your prior experiences, do you have a sense as far as usually how long does it take for new internal controls to be proven to be effective?
I'll say that I've never had an experience like this before. However, I think in our minds, our goal is that we would like to have remediated material weaknesses as we exit fiscal 2020.
Okay. Thank you. What are the key metrics that you intend to share on a go-forward basis, and what would you suggest is the key things that we should be looking at going forward?
You mean in terms of operating performance or related to internal controls?
Operating performance. One of the things that you guys used to give were ASPs per server. I think you moved to ASP per node and you used to also give units and things like that. Also the segmentation information.
I think if you notice in the most current filings, we have kind of converted to discussions of ASP movement as well as volume movement, and I think we'll continue to go forward with that level of disclosure. One thing that's important is that we are trying to look at how we describe our growth in terms of products, in terms of channel, in terms of end market. We will be doing that on a go-forward basis to be able to give more color. We will acknowledge the fact that we've kind of gone dark on that as we've done business updates. Our intention is to resurface with that kind of information as we exit this quarter in the upcoming call.
Does that mean that you're going to go back and provide that segmentation detail in the periods that were dark, or we're just going to be getting that segmentation detail as you report the new sets of results?
Yeah, certainly, we'll do that as we go forward. We'll look to see how far we've passed the test.
Okay. Thank you, and great to see the filings.
Thank you so much.
Ladies and gentlemen, that is star one if you'd like to ask a question. We'll go next to Ananda Baruah with Loop Capital.
Hi, guys. Good morning. Appreciate you taking the questions here. Just a couple from me, if I could, and congrats on continuing to move the ball forward here. Good stuff. Bigger picture, do you guys have any sense of what the business impact has been from key customers as a result of the situation with the filings? I have a follow-up in that regard as well. Thanks.
Yeah, there are some impacts for sure. That's really us during a difficult time. However, our foundation has been much stronger now. Capacity, software management tool. I believe overall, [business] foundation has been much stronger than before even.
That's great. I guess that begins to answer what was my follow-up. I was going to ask if in conversations with customers, you've been able to get a sense or develop a view on the degree to which their confidence could increase as you continue to get the filings out and as you continue to work with and to Nehal's question, the dynamic around sort of not having to say you have a material weakness in the financial control. Have you had those kinds of conversations with them, would be able to be there?
Yeah. Overall, our partner, former customer, former vendor, both are kind of excited to see how we get out of this difficult time. We see that a much stronger system, including SAP system implementation. We believe [audio distortion] starts to get back to normal growth. I'm going to answer your question a little bit different way. Last night, we had an opportunity to talk to our key leaders in the company. One of the key elements that I told sales was, "Okay, we've just taken one fudge factor out of the mouth of the salespeople at our competitors." Go out and compete for business now. Bring it home.
Yeah. That's great. That's good context. I appreciate that. Great. I'll get back in the queue. I'll leave it for now. Thanks, guys.
Thank you.
Again, ladies and gentlemen, that's star one for your questions. We'll go next to Aaron Rakers with Wells Fargo. Mr. Rakers, your line is open. Please check your mute function.
Sorry about that, guys. Thanks for taking the questions and also congrats on getting through this. I guess back on the segmentation question, just kind of curious, if you're going to give the actual numbers retrospectively on the adjusted revenue between systems revenue and subsystems over the period that you've just restated. Could you just remind us again of where you stand as far as your capacity footprint, in terms of the overall business and how we should think about that maybe going forward? How much do you think you can grow going forward and where do you stand on the current capacity to support that growth?
During the last two years, we continue to grow our capacity. I'd rather say we have at least 30%, 40% extra capacity to grow, for both completed system and subsystem. With our management software, global service, global operation, much stronger than before. I believe the growth trend is pretty strong.
To get to your segmentation question. Obviously, we've had quite a bit of revenue moving around, and we'll put together the segmentation going back at least through fiscal 2018. Yes, 2018.
Okay. As a real quick follow-up. If I'm doing the math correctly, it looks like just on the restated basis for the March and it looks like the June quarters this year, you saw a decent move higher in terms of gross margin. I think you were, call it 13%, 14% move to north of 15% here in those two quarters. Can you, just looking backwards, help us understand or appreciate the drivers of that gross margin? Is that just component cost dynamics? If so, how do we think about those component cost dynamics hitting the P&L going forward?
Yeah, certainly. As we've talked through our time, we've said that we've had improved product mix. We've had improved customer mix as well as geographical mix. If you look in the filings over the course of time, the portion of our sales that are in Asia have decreased, and that usually is a very competitive part of the world, as you know. I think one element that I should mention here as well is that I haven't in the past is that our service business is growing, and it's beginning to contribute to that element as well. I think those are the main dynamics in terms of growth in the margin line.
Services is being driven by enterprise customers? How much is services as a percentage of revenue? Can you help us understand that comment?
Yeah. It is still a very modest number, and it is really driven by enterprises. That's true.
Okay. I'll get back in queue. Thanks.
Again, ladies and gentlemen, that is star one for your questions at this time, star one. We'll go next to Jon Lopez with Vertical Group.
Hey, good morning. Thanks for taking the question. Congratulations. I had two quick ones, if I could. The first one is my recollection, and I haven't gotten all the way through the language, but hopefully it is. My recollection was when you guys entered into a couple of your credit line renegotiations over the last year or two, there was some restrictions in terms of what you could do in terms of working capital and also in terms of capital return. My question is just with the completion of these filings, do the terms of your credit arrangements change, or will you be renegotiating those? Just a quick update on that topic would be great.
Hi, Jon. Thanks for noting that. In fact, we've met a milestone by filing before the end of the year. That takes any need away for any kind of renegotiation. Yes, the terms of the credit agreement remain in place. Certainly, as we move forward from here, the credit facility expires in June, and between now and then, I think we have opportunities to renegotiate for what we would like the credit facility to look like going forward.
Okay, that's great. My second question, I'm wondering just if you can speak a bit, I know there's been a couple of questions on this, but if we just look at the detail, now that we've gathered geographically. Your fiscal 2019, not unsurprisingly, featured headwinds in Asia Pacific, but growth everywhere else. Those trends changed a little bit through the course of the fiscal year. But at a high level, can you just talk a bit about what you're seeing in Asia Pacific, and then within that, what you're seeing specifically within China? If there's been any change in your view of that market strategically, is it a place you're devoting less resources to, intentionally or otherwise? Just how we think about that as we think about a potential market recovery in 2020 and beyond.
Yeah. Thank you for the question. We see that we still have a lot of room to grow. For example, in Asia, we have started focusing much more on Japan, Korea, and in Europe, East Coast especially, we start to invest more sales and promotion effort supporting function East Coast. We believe, overall, global-wise, we will have a lot of room to grow in the coming quarters and year.
That's really helpful. Would you mind just spending a second on China specifically, though? Asia PAC's about 20% in total. You guys historically have suggested China was like 10%, and that was admittedly back in 2017. Would you just flesh out China briefly, if you don't mind?
China may drop a little bit. Hopefully not drop too much. Overall Asia, next year, I believe we will try to maintain around 20%.
Gotcha. Okay. Congrats again. Appreciate the help.
Thank you.
We'll take a follow-up from Ananda Baruah with Loop Capital.
Yeah. Thanks. Appreciate you guys taking the follow-up here. Just a couple on the P&L, if I could. Could you talk through what our expectation is or how we should think about how you guys are thinking about driving operating leverage going forward and what we should think about from an expense OpEx structure perspective? The revenue has been growing. The leverage hasn't kicked in yet. What have been the drivers of that, and what are your expectations as we go forward? Thanks.
Yeah. I think, in the GAAP to non-GAAP reconciliation, we have broken out the costs that we had to endure through this process just to give you a feeling of how things are going to drop up over the course of time. As it relates to the leverage question that you have, we will continue to try and improve our operating leverage. We are very cognizant of the fact that we want our return to be a growth company, so we'll be continuing to invest in that area more prudently. I think, magnitudes and those kind of things will wait for questions when we come out on an investor day.
Got it. You just mentioned Investor Day. Have you made a decision yet around the Investor Day? If you have, can you share any of the details?
No, we haven't. We do know that once we get finally done and we get relisted, we need to come back out and have an analyst day, investor day, et cetera, speak in terms of who is Supermicro now and what is it that we're modeling for our performance.
Okay. That's helpful. Thanks. Just one real quick one for me. Do customers still bring up specifically, the Bloomberg story from kind of 12 months ago, a little more than 12 months ago, just 12, 13 months ago? If they do bring it up, how big of a sticking point do you think it might be still?
I think as it relates to our customer base, we've been in constant conversations with them. My sense is that that continues to fade in the rearview mirror. If you read our filings, we do acknowledge in the risk factors that there are some unknowns, and then the unknowns are related to what are the decisions being made at new customers that we are bidding for. Definitely, if we have an ability to approach the key architects and have deeper discussions with the engineering teams on that side, we have ability to influence those perceptions. Time will tell. I think, from our current customers, it's a little bit quieted down, certainly. It's the new customers that we have to continue to win.
Yeah, we've now indicated some turnaround in company with this advanced technology. All those are positive factors to the market, to our customer base. We are kind of well-prepared for the new stage. I mean, for get back in to pass those proper releases.
That's great. Very helpful. Thank you, guys.
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.
Yeah, thank you very much for joining us today and looking forward to talking to you in the coming quarter end coming. Thank you. Have a good day.
Thank you all.
Thank you, ladies and gentlemen. That does conclude the Super Micro SEC Filings Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.