Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. 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, 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, May 17th, 2019. A replay of the call will be accessible until midnight, Friday, May 31st, 2019 by dialing 1-844-512-2921 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. Thank you for attending Super Micro's business update conference call for the third fiscal quarter 2019, which ended March 31st, 2019. During today's conference call, Super Micro will address the company's filing of the Form 10-Q 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 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.
Thank you, Perry, and good afternoon, everyone. Let me first comment on our 10-K filing. We are pleased to have filed our fiscal 2017 10-K. We are able to ensure the accuracy of our financial reporting has taken more than 18 months of focus and collaborative work between our Super Micro team and our outside advisor teams. It has become clear through this effort that some of our process and procedures had not kept up with our faster growth, the size of our company, and the pace of our business. The team acknowledged that necessary internal control need to be strengthened for precise revenue recognition quarter by quarter, despite all of our business transaction results in eventual revenue. Most importantly, I would like to thank all of our Super Micro employees, partners, customers, and investors for their dedication and support during this period.
Although our sales efforts have been certainly impacted by our 10-K filing delay and forced negative press last year, that did not affect our growth plan and our foundation has been the strongest in our 25 years' history. Now let me comment on the March quarter. Our third quarter revenue will be in the range of $742 million-$752 million, which is below our quarterly guidance and represents approximately 5% year-over-year reduction. The main reasons have been the key components price drop and volatile macroeconomic condition. Earnings per share will be in the range of $0.48-$0.52, compared to the range of $0.48-$0.52 last year and the range of $0.57-$0.61 last quarter. System revenue was approximately 81% of total revenue, flat with last year. Both system and node ASP were higher year-over-year due to richer mix of computer systems.
Revenue for Robo2K accounts and accelerated computing were higher year-over-year, offsetting lower storage and IoT revenues. We are increasing our capacity for future growth. As our business continue to rapidly scale with over 1.2 million server and storage systems shipped globally last year, increasing our production and service capacity and capability is vital. We recently held a groundbreaking ceremony for our Supermicro Science and Technology Park expansion. It was attended by over 200 business and government officials. The new 88,000 sq ft building will expand our production capacity, hardware and software R&D, and our SD-Square methodology based on our resource-saving design and large scale design technologies. Our SD-Square will enable us to provide a more power efficient, cost-effective, and flexible data center build out solution to the market, including application optimized solutions for medium and small sized customers and data centers.
We are also expanding our Silicon Valley headquarters, building 23 in the third of five new facilities in our San Jose Supermicro Green Computing Park. As the only global tier 1 server and storage provider to manufacture in Silicon Valley, we are well positioned to provide the best possible solutions to the most innovative enterprise data center channel and cloud customers. Super Micro leads the industry with the 2nd Generation Intel Xeon Scalable processors. The recently launched Xeon processors, known as Cascade Lake, is a refresh of Skylake launch last year. The frequency of GPU and memory module refresh highlights the importance of our resource-saving design to the industry and to the environment. Supporting new CPU with new technology, including Intel Optane DC persistent memory, NVMe, NF1, and EDSFF.
The new Super Micro X11 generation product line, again, is offering leading performance and the best TCO and TCE total cost to environment for all the data center around the world, empowered by highly efficient non-volatile subsystem that last over 12 years. The resource-saving systems are especially optimal for fleet deployment on the edge and the remote micro data centers. Our high-density systems, such as BigTwin, one of petascale NVMe storage, resource-saving SuperBlade and MicroBlade, have been the preferred choice for many public and private cloud customers. These low latency, high bandwidth, high density, high capacity systems are exactly the best solutions for supporting a strong wave of 5G, deep learning, AI, and cloud age applications. I expect that these optimal server solutions will show strong growth momentum and a rate of multiple times faster than the IT hardware industry average.
In summary, we are pleased to have filed the 2017 10-K and begun the process of improving our internal controls. Now we are able to focus more on the bright future and the tremendous opportunity ahead of Super Micro. We are moving full speed, leading with our increased global manufacturing capacity and innovation, such as the resource-saving design. I am fully confident that we will continue to win the market and to provide the best server and storage solutions for today and tomorrow's demanding workloads. With 25 years of a strong foundation, paced by the best engineering minds, enhanced operations, and focused sales force, Super Micro is on the rise again. For the first fiscal quarter ended June 30, 2019, we are guiding net sales in the range of $770 million-$830 million, with a great position to start our faster growth trend again.
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 third 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 third quarter revenue was within the range of $742 million-$752 million. 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 U.S. Our estimated range of gross margin on both a GAAP and non-GAAP basis was from 15 and a half%-15.7%. Our margin benefited from improved customer and product mix, partially due to lower sales to Asia, lower storage revenue, and better component pricing.
Operating expenses were low this quarter due to lower employee bonuses, offset by an increase to reserves for bad debt. In this quarter, we released a $3.2 million tax reserve relating to a lapse in the statute of limitation in the tax jurisdiction. We estimate non-GAAP diluted EPS this quarter was within the range of $0.48-$0.52. We continue to generate cash, and estimate cash generated from operations was approximately $112 million. After deducting CapEx of $7 million, we estimate free cash flow of approximately $105 million for the quarter. On a cumulative basis over the last three quarters, we estimate free cash flow of approximately $189 million 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 was primarily due to an increase in inventory days based on the methodology of averaging with the previous drawing quarter. Actual inventory declined sequentially. Our cash conversion cycle target remains 85 to 90 days. Let me comment on the filing of our fiscal 2017 10-K. We are very pleased to have filed our form 10-K for 2017 that included the restatement of our financial statements for fiscal 2015 and 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 restatements and adjustments was 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.
As Charles said earlier, in our 2017 Form 10-K, we acknowledged 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 are a different company today and are better able to address our remaining challenges. To close, I would like to thank the extended team and devoted employees who put in countless hours to achieve this goal. We are turning our attention to finishing fiscal 2018 for audit and remain focused on becoming fully current on our SEC filings. To our shareholders, we appreciate your support through this long process and look forward to updating you again next quarter.
As indicated previously, we will have a Q&A session next, where sell-side analysts will be permitted to ask questions. Operator, at this time, we are 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 followed by the 1 on your touch-tone telephone. We will take your questions in the order that you signal, and if you have found your question has been asked and answered before you could ask it, or if you would like to remove yourself from the queue, please press star 2. Also, if you are on a speakerphone, please make sure that your mute function is disengaged so that your signal can reach our equipment. Finally, we ask that you limit yourself to 1 question and 1 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 1 if you would like to ask a question. We'll first go to Mehdi Hosseini with Susquehanna Financial Group.
Hi. Thanks for taking the question. This is David Rizik for Mehdi Hosseini. First off, congrats on the 10-K filing for fiscal 2017. I just wanted to understand March quarter. In mid-February, you offered the target of $800 million-$860 million, and it came out materially lower. What happened between mid-February and the end of March? Was it just customers pulling orders? I just wanted to learn more about what happened there. Thanks, and I have a follow-up.
Kevin, you want to take that one?
Certainly as we went through the quarter, we saw the same softening that the rest of the industry saw. We did 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. That was news that we found in that second part of the quarter. As Charles articulated earlier, we're giving similar guidance, a little bit lower as we go into the next quarter. We think that the first half will have to go through a period of digestion in the industry that maybe we didn't fully comprehend 90 days ago. Certainly we look forward to the second half of 2019, depending upon how the macro situation clears up over time.
Okay. In storage, Charles, you touched on storage may be a little softer. Can you elaborate on the trends there? Was it end demand driven, macro, market share driven? Just would love any more info on the storage business.
I guess the macroeconomic and the lower key component price, as well as the tariff, that have some impact. At the same time, we are aggressively moving to a new NVMe storage solution, and we see some signal of recovery gradually.
Got it. Thank you. Then on gross margins, it looks like a pretty sizable uptick. Perhaps maybe you could rank the drivers, mix, components, geographic mix. Would love a little more detail there. Thank you.
Kevin, you want to take that one?
Yeah, I think in that quarter, don't know about the relative materiality of these in the way that they're ranked, I think really the product mix in terms of storage was probably the most large impact, probably the customer mix, and lastly, the component pricing changes over time.
Is it safe to say that we can anticipate this type of level for the June quarter and the balance of the year?
Yeah. I wouldn't necessarily say that. I think we had a very good alignment of vectors in this particular quarter, to the extent that we have continued decline in component costs, in terms of memory and NVMe. We will have some continued improvement over the quarter that we had before, which was roughly about 14% or so. Certainly, I don't expect that it will be up to this level. I think we had a great confluence of events this quarter that put us one quarter ahead of what we expect to do in terms of some sustainable, modest improvement in our gross margin profile from our historical patterns over the course of time.
Thanks so much. I'll get back in the queue.
We'll take our next question from Nehal Chokshi with Maxim Group.
Yeah, thanks. Based on the gross margin approximation and the EPS, it sounds like OpEx was down significantly Q over Q. Is that correct?
It was modestly down. As we said, the key things were is that since we had smaller revenues, we made a lower provision for employee bonuses, suffered a little bit in terms of some bad debt, but not significantly on a non-GAAP basis. They're a little bit more spread on a GAAP basis in that we had some costs associated with the restatement as well as last quarter's activity related to responding to the article that were less in this quarter.
Right. On a non-GAAP basis, R&D would have been about flattish Q over Q, therefore that's one of the reasons why you remain confident in the long-term outlook?
If I recall correctly, R&D grew a little bit, it wasn't tremendous.
Okay. There have been some reports, I think from Bloomberg, that Super Micro has asked suppliers to move their supply chain out of China. Is that true? First, address that, maybe.
Basically, it's to fulfill our increasing business. We believe that the demand from the market will continue to be strong. We are indeed growing our capacity globally, in Silicon Valley, in Taiwan, and in Netherlands. It's part of our long-term growth plan.
Nehal, 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 for future expectation on our growth.
Okay. To be clear, I think that the article was saying that Super Micro is asking its motherboard suppliers to move manufacturing out of China, not so much Super Micro's assembly and internal manufacturing capacity.
Yeah, we're not going to comment on those stories. Can you have another question?
Sure. Let's see. Yeah. Do you have 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 business here are growing well, and we believe with the new Cascade Lake solution, NVMe, as you may know, we are a true leader for new generation memory, NVMe, NF1, EDSFF. we do believe our growth will be strong in the coming future.
Okay. can you give approximate performance by verticals, those being storage or data center, IoT, high performance compute, enterprise, and channel?
Nehal, we're not going to break that out at this time.
Okay. All right. can you provide some guidance as far as 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 million or so.
Got it. Okay. Thank you. That's it for me.
We'll take our next question from Michael Staiger with Odeon Capital.
Hey. Yeah. Thanks for taking my question, or questions, I suppose. Just a kind of a clarification on gross margins. Should we expect a similar level, or is there a range that you think you could provide, moving into the next few quarters? On top of that, if you're expanding capacity, are you expecting a, I don't want you to say radical shift in demand, but what's the demand picture look like into the next few quarters? That's it. Thanks.
Yeah. 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 thirteens. Last quarter, I think we hit 14.1%. This quarter, we had that sizable jump because of all of those events. We do have the ability to get cheaper costs for a moment in time before they're passed on to customers. The ramp and the severity of those price changes could occur into the future, but maybe not to the extent. 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. I think that that's still the case today.
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. The cash flow probably will consistently work along those lines that we have today, until we start to show significant growth. When we have significant growth, we'll have to reinvest in working capital in order to achieve that.
All right. Thanks, guys.
We'll take our next question from Jon 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 Lake pipeline, can you just characterize how things are shaping up? One way to look at this is 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 stronger for sure, for a couple of reasons. One is the Cascade Lake system. Customer already qualified, and it's a much better performance per dollars. The customer for sure will move there aggressively. Second is the second generation storage, NVMe, including EDSFF, NF1. We see a customer start to ready to move in volume, and together with our 10-K DBA program, have been almost fixed. That will be all a positive trend 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 outpaced 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? 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 two?
We are well prepared for the tariff, the trade program, and continue to make our capacity, our capability, and product line ready. We believe the near future and mid-term future will be great. A great trend for us. Especially our internal control system has been dramatically improved, and new SAP implement has been much stable now. Our business is getting ready for another trend of faster growth, I believe.
Okay, thanks. Helpful. My third question, I haven't gotten through the refile document entirely yet, but my recollection was, at calendar Q3 or so of 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? B, any thoughts, I know you just referenced tariffs, but any thoughts in terms of local consumption, what, if anything, recent developments mean? I guess, C, Huawei is obviously, I believe, the fourth largest server vendor by units as of 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 in geographies where you overlap?
Basically, we continue to grow globally. U.S.A. is still our main market, but Europe, Asia, including Japan, China, we continue our plan to grow globally. We are much greater than before able to grow globally.
That's helpful. Would you mind just updating on that China exposure specifically, though?
China market, indeed, we feel nothing really changed. We just continue to grow our stable plan, and our partnership, they are also stably growing.
Jon, our China exposure can be, in any quarter, somewhere between 10%-15% of the overall revenue. As you know, the March quarter, there's a lot of seasonality with the Chinese Lunar New Year, et cetera, that impacts our revenue from China.
Sure. No, that's helpful. Thanks, Perry. My very last question, I don't understand entirely, but it sounds like there's clearly been some working capital help on the cash balance, and I think you guys have started to get a bit more proactive on some of those metrics. At the moment, you've got over $160 million of cash on the balance sheet, and I realize or I think what you're effectively telling us is that's going to flux around a little bit as working capital trends up. I'm wondering, just in light of events of the last two 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 maybe more sustainable free cash generation looks like?
Yeah, I think we've had a good run over the course of the last four or five quarters, and as you said, we've 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. Then I think it would be only at some later date that we would look to think about those things as being potentials on the table. At the moment, we don't foresee any repurchase plans that we would take to the board or suggest to them.
Okay, helpful. Thank you.
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 for joining us today, and have a great one. Thank you.
Thank you, ladies and gentlemen. That does conclude the Super Micro third quarter fiscal 2019 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.