Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Incorporated Third 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, but the entire call is open to all participants on a listen only basis. As a reminder, this call is being recorded Friday, May 17, 2019. A replay of the call will be accessible until midnight, Friday, May 31 2019 by dialing 1844 512-2921, and entering replay PIN, 3378860. 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 would like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.
Good morning, and thank you for attending Super Micro's business update conference call for the 3rd fiscal quarter 2019. Which ended March 31, 2019. During today's conference call, Super Micro will address the company's filing of the form 10 QAs and form 10 k for 2017. And efforts to become current with its remaining SEC filings and the company's preliminary financial results for the third 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. Before we start, I'll remind you that our remarks include forward looking statements. There are 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 Supermark'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, I'll now turn the call
Thank you, Terry, and good afternoon, everyone. Let me first come in on our. We are pleased to have filed our fiscal 2017 10 K. Now able to ensure the accuracy of our financial reporting had taken more than 80 months of focus and collaborative work between civomatic team, and our outside adviser teams. Did it became clear, small data for that?
Some of our proceeds and particulars and not hit us with our profit goals. The size of our company and the pace of our business. The team acknowledges that necessary internal control need to be chasing. For precise media recognition quarter by quarter. Since spite of our business transaction results, in eventual revenue.
Most importantly, I would like to thank all of our civil network employees partners, customers, and investors for their dedication and support during this period. Although our sales efforts have been certainly impacted by our thinking filing today and forced next week breaks last year. This now affects our growth plan, and our foundation has been the strongest in our 25 years history. Now let me come in on the March quarter. Our 3rd quarter revenue will be in the range of 742 to 752 in here, which is below our quarterly address and represent approximately 5% year over year of departure.
The main reasons have been the key component price of and volatile economic condition. Earnings per share will be in the range of 48¢ to 52¢ compared to the range of 48 to 52¢ last year. And the range of 57 from 51¢ last quarter. System revenue was approximately 81% of total revenue. Flat this last year.
Both system and non ASP were higher year over year due to with your next call, computer system. And accelerating it competing or higher year over year, offsetting lower storage and IoT readiness. We are increasing our capacity for future growth. As our opinion continue to work steadily, scale with over 1,200,000 server installed in the system. She's gobbling up the increasing our capacity and service capacity and capability to the vital.
We recently held a groundbreaking ceremony for our Asia Funds And Economic Park expansion. It was attend by over 200 business and government officials. Then we will clear the 1000 square feet building. Where we spend our production capacity, hardware, and our, SD square, Mr. Talridge.
Based on our research service design and direct care design technologies. It's it's where it never hurt to provide the more power efficient, cosynthetic, and flex water center, building blocks, solution. To the market, including application optimized solutions for medium and small size. Customer and sales centers. We are also expanding our Silicon Valley headquarters.
Within 23, in the field of finding facilities in our San Jose, we're in Computing Park. As our global tier 1 server and storage provider to manufacture in Silicon Valley. We are well positioned to provide an efficient possible solution. These are most innovative enterprise data center channel and cloud customer. She will make a lot of images by English with the 2nd generation into a Zio's scatable process airport.
The recently announced Zio process long as Cadek is a decrease of, Skydeck's launch last year. The frequency of GPU and memory modules refers highlight the importance of our resource saving design to the image and to the alarm, support a new CPU with a new technology and grow the imaging care, obtain PC, persistent memory, NVMe, nfone, n e p s f f. The new Chicago X Eleven generation for timeline. Again, is offering meeting performance and the face of the PCO and PCE. Total Coast to united.
For all our data centers around the world, empowered by highly efficient Notivity subsystem. The last of our fair years. Especially optimal for field deployment on the edge and, remote micro data center. Our high density system, such as between when you have a scale and your storage, This is saving chifel bread and knuckle bread. I think the putting forward chose for many public health and private car customers.
This low latency has been with high density, high capacity system are investing in the basement solutions for supporting a strong wave. Of 5g, Deepadani, AI, and Karl Edge applications. With that, I expect that This optimal server solution will show strong growth momentum and the rate of multiple times faster than the IP hardware industry, tablet. In summary, we have print 2 filed 2017, 10 K and began a process of improving our internal controls. Now we are able to focus more on the bright future and, tremendous opportunity.
We are moving full speed, leading with our increased global manufacturing capacity and innovation. Such as the business service design. I have full confidence that we will continue to win the market and to provide the digital server and storage solutions for today and tomorrow's demanding workload. With 25 years to hold a storm on their end, save by the pay for engineering night. Enhance operations and focus Salesforce.
Shivomaco is the online rice again. For our 1st fiscal quarter end of June 30, 2019. We are guiding net sales in the range of 772,000,000 to 330,000,000 with a great position to borrow faster growth trend again. And now I will hand my attention over to Kayla.
Thank you, Charles. First, I will address the current health of the business by providing an overview of our financial performance for the third quarter of 2019. I will then make a few comments about our progress on our SCC filings. As Charles mentioned earlier, we estimate our fiscal 3rd quarter revenue was within the range of $742,000,000 to $752,000,000. On a year over year basis, EMEA was the weakest geography with a decline of approximately 21%, followed by a 10% decline in Asia, offset by a 7% increase in the US.
Our estimated range of gross margin on both a GAAP and non GAAP basis was from 15 a half to 15.7%. Our margin benefited from improved customer and product mix, partially due to lower sales of Asia, lower storage revenue, and better component pricing. Operating expenses were lower this quarter due to lower employee bonuses, offset by an increase to reserves for bad debt. In this quarter, we released a $3,200,000 tax reserve related to a lapse and the statute of limitation in the tax jurisdiction. We estimate non GAAP diluted EPS this quarter will be within the range of $0.48 to $0.52.
We continue to generate cash and estimate cash generated from operations was approximately $112,000,000. After deducting CapEx of $7,000,000, we estimate free cash flow of approximately $105,000,000 for the quarter. On a cumulative basis over the last three quarters, we estimate free cash flow is approximately $189,000,000 that has allowed us to pay down our loans and reach a positive cash position. This quarter, our cash conversion cycle increased to 106 days. The increase is primarily due to an increase in inventory days based on the methodology of averaging with the previous strong quarter.
Actual inventory declined sequentially. Our cash conversion cycle target remains 85 to 90 days. Now let me comment on the filing of our fiscal 201710 k. We are very pleased to have filed our Form 10 K l t theft for 2017, that included the restatement of our financial statements for fiscal 2015 2016. This was a comprehensive undertaking that involved a detailed and thorough examination of our historical financial statements as well as our accounting policies and procedures and our internal controls.
The primary cause of our statements and adjustments with the timing of revenue recognition and certain changes to accounting for inventory and other adjustments. All the sales that we examined will be ultimately recognized as revenue. At Charleston earlier, in our 2017 Form 10 K. We acknowledge weaknesses in our internal controls that existed as of June 2017.
I encourage everyone to
fully read our report on internal controls or financial reporting where we articulate our remediation plan. And progress to date. We're a different company today and are better able to address our remaining challenges. So to close, I would like to thank the extended team of devoted employees who put in countless hours to achieve this goal.
We
are turning our attention finishing fiscal 2018 for audit and remain focused on becoming fully current on our SEC filings and to our shareholders, We appreciate your support for you this long process and look forward to updating you again next quarter.
As indicated previously, we will have a q and a session next We're a sell side analyst. We'll be permitted to ask questions.
Thank you, We will take your questions in the order that you signal you. Also, if you are on a speaker phone, please make sure that your mute function is disengaged so that your signal can return equipment. Finally, we ask that you limit yourself And we'll first go to Mehdi Hosseini with Susquehanna Financial Group.
Hi. Thanks for taking the question. This is David Ryzhik for for Mehdi Hosseini. First off, congrats on the, on the 10 K filing for fiscal 2017. So I just, wanted to understand, March quarter.
In, mid February, you you offered the target, of 800 to 860. And it came out, materially lower. What happened between mid February the end of March? Was it just customers pulling orders or Just wanted to, learn more about, what happened there. Thanks.
And I have a follow-up.
Kevin, you wanna take that one?
Yeah. Sure. So, certainly, as we went through the quarter, we saw the same softening that the rest of the we saw. We did, you know, observe customers' behavior towards the end of the quarter. We had gotten some feedback that they were digesting purchases, as we got towards the end of the quarter.
And so, that was news that we that we found in that, that second part of, of the quarter. And as Charles articulated earlier, We're giving, you know, similar guidance a little bit lower as we go into the next quarter. So we think that the 1st half will have to go through you know, a period of digestion in the industry, that maybe we didn't fully comprehend, 90 days ago. And, certainly, we look forward to the second half of 'nineteen, depending upon how the macro situation clears up over time.
Okay. And, in storage, Charles, you touched on storage maybe a little softer. Can you elaborate on the trends there? Was it was it, end demand driven macro market share driven, just would love any more info on on the storage business.
I did the microeconomics and, now lower key component to price as well as the batteries that, have some impact. At the same time, we are aggressively moving to a new NVMe, storage solution and we see some chicken up to recover.
Got it. Thank you. And then on gross margins, it looks like a a pretty sizable, uptick. Perhaps maybe you can rank, the drivers, mix, components, geographic mix, Would love a little more detail there. Thank you.
Kevin, in my quarter and don't know about the relative materiality of these in the way that they're ranked, but I think really the product mix in terms of storage was probably the most large impact, then probably the customer mix. And then, lastly, the, the component pricing changes over time.
And is it safe to say that, we can anticipate the the type of level for for the June quarter and the balance of the year?
Yeah. I, I wouldn't necessarily say that. I think we have a very good alignment of of vectors in this particular quarter, to the extent that we have continued decline in in component costs you know, in terms of a memory in NVMe, we will have some continued improvement over the quarter we had before, which was roughly about 14% or so. But certainly, I don't expect that it will be, up to this level. I think we had a great influence of events this quarter that, that put us 1 quarter ahead of what we expect to do in terms of some sustainable modest improvement in our gross margin product filed from our historical patterns over the course of time.
Thanks so much. I'll get back in the queue.
And we'll take our next question from Nahal Toshi with Maxim Group.
Yeah. Thanks. Based on the gross margin approximation and the EPS, it sounds like OpEx was down significantly q or q. Is that correct?
It was it was modestly down. So as we said, the key things were is that since we had, you know, smaller revenues, we made an oral provision for employee bonuses. Suffered a little bit in terms of some bad debt, but not not significantly on a non GAAP basis. They're a little bit more spread on a GAAP basis and that we had some costs associated with, the, the restatement as well as last quarter's activity related to, responding to, the article that, that were less than this quarter.
Right. So on a non GAAP basis, R and D would have been been about flattish here with you. And therefore, that's one of the reasons why you remain confident in the long term outlook?
It it I'd if I recall correctly, R and D grew, a little bit, but it wasn't a tremendous.
Okay. And then there have been some reports, I think, from Bloomberg, that Super Micro has asset suppliers to move their supply chain out of China. Is that true? And is that, first, address that maybe?
Basically, to, for 3 hour increase in the business. We believe, that demand from the market will continue to be strong. So we are indeed a girl in our capacity in global, in Silicon Valley, in Taiwan and in Netherlands. So it's part of our long term, growth plan.
Nehal, I I think that, those articles that you referenced, were not accurate in reporting. We are, increasing our capacity as we mentioned in our Taiwan facility, primarily for growth, as well as for the building 23 that we're building here in San Jose. Again, primarily growth future expectation on our growth.
Okay. To be clear, I think that the article was saying that Super Marco is asking its motherboard suppliers to move manufacturing out of China, not so much super micros, assembly, and internal manufacturing capacity. So And
we're not gonna comment on the storage. Can you have another question? Sure.
Let's see.
Yeah.
Do you have a thoughts on how HP Enterprise buying Cray may change the competitive dynamics for the high performance computing portion of Super Micro's business?
Indeed, our overall teams feel, are going well. And, we believe, with the new cash headache, a solution, NVMe, as you may know, we are a 2 leader for, next generation memory. Any any any one, EBS, EBS. So we do believe, our growth was strong in the coming future.
Okay. And can you give a approximate performance by verticals, those being, storage or a data center, IoT, high performance compute enterprise and channel? Nehal, we're not going to break that out at this time. Okay. Alright.
And, Can you provide some guidance as far as what were what was the what is actually the fully diluted shares outstanding for the March quarter?
I will provide that to you, after the call. Okay.
Yeah. It's still roughly about $50,000,000 or so.
Got it. Okay. Thank you. That's it for me.
And we'll take our next question from Michael Stager with Odeon Capital.
Hey, thanks for taking my question, or questions, I suppose. On the gross, just a kind of a clarification on gross margins, are we should we expect a similar level? Or is there a range that you think you could provide, you know, moving into the next few quarters. And on top of that, if you're expanding capacity, are you expecting a, I don't mean to say radical shift in, in demand, but What's the demand picture look like in the next few quarters? And that's it.
Thanks.
Yeah. So as I said earlier, we certainly had a great confluence of events this quarter that, let us achieve the gross margin result for the quarter. We had been, not too many quarters ago, in the mid third teens. And last quarter, I think we hit 14.1. This quarter, we had, you know, that sizeable jump because of all of those events.
You know, we do has, the ability to, get cheaper costs for a moment in time before they're passed on to customers and, the ramp and the severity of those price changes, you know, could occur into the future, but maybe not to the extent. So to kind of give you, some kind of a feeling for that. I think that grounding ourselves in that low 14% gross margin and then modest improvement over that is really the trend that we had articulated last quarter and I think that that's still the case today.
And just as a quick follow-up, can we expect the cash flow performance to be, in a similar range, going forward?
Our cash flow is very much tied to our working capital needs. So, the cash flow probably will consistently, you know, work along those lines that we have today. Until we start to show significant growth. And when we have significant growth, we'll have to reinvest on working capital in order to achieve that.
Alright. Thanks, guys.
And we'll take our next question from John Lopez with Vertical Group.
Hi, thanks very much guys. My first question, I think the first half weakness is certainly understandable given the confluence of things happening around you. I suppose my question for you here is, as you think about the second half of the calendar year, and particularly about the cascade like pipeline. Can you just characterize how things are shaping up? I mean, when we look at this as Intel's implied guidance, suggests a very strong second half of the calendar year.
I'm wondering if that's consistent with how you guys think about the second half of the year, or is there something either customer related mix related, geographically related that may make you marginally different from that implied outlook?
Yeah. We believe the second half will be a stronger with you on, for a couple of reasons. 1 is the CapEx, system, customer, very qualified. And, it's a much better performance for Dallas, the customer with you, and we'll move that eventually. And second is, the 2nd generation storage, I mean, NVMe, including and everyone.
We see a customer start to, to move in Durham. And together, this is our 10 KTV program. Have been, almost free. So, there will be over positive, even for us.
Excellent. Thanks. My second question is, again, I'm obviously not looking for guidance here, but just conceptually, you guys have pretty comfortably updates the server market in aggregate for the last multiple quarters. I'm wondering, as you think about, say, this calendar year, Would you expect to continue to be able to do that? Or again, sort of same question, are there maybe some geographical product exposure things that may make that different or more difficult in this calendar year versus, say, the prior 2?
We have we have to prepare for the tariff but trade the program. So, and, continue to make our capacity, our capability, and product line ready So we believe, Nina's future, and we need the computer. That'd be great. Great. Especially, our internal control system had been a German dramatically improve.
And, new SAP increment had been a much stable now. So our season is getting ready for another turn of faster growth, I believe.
Okay. Thanks. Helpful. A great question. I I haven't gotten through the the the restyle document entirely yet, but my recollection was at calendar q 3 or so 2017.
China was about 10% of your total revenues. I'm wondering, a, can you just update us at least directionally on what your China exposure is right now? And, b, well, I guess, at the end of CB, you know, any thoughts? I know you just referenced tariffs, but any thoughts in terms of local consumption, what if anything recent developments mean. And I guess C flaw is, obviously, I believe, the 4th largest server vendor by units, as in the last quarter.
Not a lot in the U. S, but certainly a lot of European exposure for them. I'm wondering, just conceptually, what do you think the current developments may mean for perhaps share potential for you and geographies where you overlap.
Basically, we continue to grow globally. I mean, USAA is a shield or a main market, but, Europe, Asia, are including the Japan China, we, continue our plan to global to grow globally. And we are much, directing them before able, to, to grow globally.
That that's helpful. Would you mind just updating on that China exposure specifically though?
China marketing is, we feel, nothing really, a change. So we just continue to, grow our stable, plan. And, our partnership today are also a stable growing.
John, our China exposure can be in any quarter, you know, somewhere between 10 to 18% of the overall revenue. As you know, the March quarter, there's a lot of seasonality with the China Lunar New Year. Etcetera, that impacts our revenue for China.
Sure. That's helpful. Thanks, Perry. Sam, a very last question. I understand that you might not understand entirely, but it sounds like there's clearly been some working capital help on the cash balance in think you guys have started to get
a bit more proactive on some
of those metrics. At the moment, you've got over $160,000,000 of cash on the balance sheet. And I realize what you're or I think what you're effectively telling us is that's going to fluct a little bit as working capital trends up. But I'm wondering just in light of events in the last 2 years or so, any higher appetite for things like share repurchase or some amount of capital return, or is that tabled until we get some level of visibility into what may be more sustainable free cash generation looks like?
Yeah. I think we've had a good run, you know, over the course of the last 4 or 5 quarters, And, as you said, we paid more attention to it. We've been able to drive cash flow. I think we need, more time, to make sure that we've gone through a few cycles to get really confident in where our cash flow is. And then I think it would be only some later date that we would look to, you know, think about those things as being potentials on the table.
But at the moment, we don't we don't force see, you know, any any repurchase plans that we would take to the board or or, suggested them.
Okay.
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 for joining us today. Have a great one. Thank you.
Thank you, ladies and gentlemen. That does conclude the Super Micro Quarter Fiscal 2019 Business Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.