Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer Incorporated First 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. The entire call is open to all participants on a listen-only basis. As a reminder, this call is being recorded Thursday, November 15th, 2018. A replay of the call will be accessible until midnight, Thursday, November 29th, 2018, by dialing 1-844-512-2921 and entering the replay pin 3001732. 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 of Investor Relations. Now I'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.
Good afternoon, and thank you for attending Super Micro's business update conference call for the first quarter 2019, which ended September 30th, 2018. During today's conference call, Super Micro will address the company's effort to become current with its SEC filings, the business and market trends from the first fiscal quarter of 2019, as well as the company's preliminary financial results for the first 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 and 8-K filings that were distributed at the close of regular trading and are 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 and our earlier 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 question- and- answer session for sell-side analysts. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.
Thank you, Perry, and good afternoon, everyone. Let me first comment briefly on our first quarter performance. Our first quarter revenue was in the range of $952 million-$962 million, which surpassed our quarterly guidance and represents approximately a 40% increase year-over-year. Our momentum in multiple verticals continued, with strong growth especially in Global 2000 storage and AI machine learning. Computer system revenue was consistent with last quarter at approximately 84% of revenue and up 56% year-over-year. Our product ASP growth continued with higher add value sale of our industry-leading technology innovations and more high-end computer systems. Kevin will provide more detail on our financial results. The focus of our strategy in the past 15 years has been our Global 2000 business, which grew 132% year-over-year.
The Resource-Saving architecture has been the key message of that focus. Leveraging our breakthrough products and further to market advantage to deliver significant savings to customers. We have achieved greater success stories with companies like NASA, Intel, and many other industry leaders. The Resource-Saving architecture reduced TCE, total cost to the environment, which brings significant TCO savings along with environmental benefits. The Resource-Saving SuperBlade and MicroBlade disaggregated design enables the independent upgrade of system components. By not ripping and replacing the entire hardware system, data center customers can save up to 60% in system refresh costs and reduce IT waste up to 50%. The Resource-Saving Twin product line fully optimize power-saving design, like free cooling, including shared power and cooling to deliver double-digit improvement in power efficiency over traditional servers.
The hot-swap NVMe, that insight support together with the Resource-Saving feature makes Twin one of the highest volume server platforms in the industry today. We launched server 1U petascale all-Flash NVMe system. That when combined with high performance fabric and OpenRack scale management software, can be used to dynamically provision critical assets such as all-Flash NVMe, GPUs, and FPGAs, reducing over-provisioning, saving costs, and reducing e-waste. We have the broadest portfolio of all-Flash NVMe systems with more than 150 system models available, making Supermicro the benchmark leader in storage, which that storage was again one of our strongest segments that drives revenue across multiple verticals, including Global 2000 and next generation storage. This advanced storage solution provide a real-time to value competitive advantage for users with data-intensive workload like big data, autonomous driving, AI, and HPC applications against traditional SSD.
We recently launched all-Flash 32 hot-swappable EDSFF drives in a high-density 1U system designed to lead the way for NVMe technology. Partnering with Intel, this new solution will support a full petabyte of high performance all-Flash storage in 1U with an outstanding 30 million IOPS and 52 GB per second throughput. Samsung has also partnered with us to develop a 1U NF1 storage server featuring the most power efficient, high bandwidth, low latency, next generation Flash technology, with the highest storage density and best IOPS performance currently available on the market. Deep learning, machine learning, and artificial intelligence solution grew very well and was up 26% from last year. At a super computing conference in Dallas, Texas this week, we showcased our cloud server based on our NVIDIA HGX-2 platform.
The SuperServer 9029GP combines 16 Tesla V100 32 GB SXM3 GPU connect via NVLink and NVSwitch to work as a unified 2 petaflops accelerator with half a petabyte of aggregated memory to deliver unmatched computing power. Our new SuperServer 6049GP is optimized for the modern AI inferencing. This 4U system achieves maximum GPU density and performance with support for up to 20 NVIDIA Tesla T4 GPUs with Turing Tensor Core technology. Let me move to other business highlights. In September, Super Micro celebrated our 25th anniversary. The company was founded in San Jose, California in 1993 in the heart of Silicon Valley. Over the last 25 years, we have grown from a Silicon Valley start to a Fortune 1000 company global leader.
As we have grown, we have rooted ourselves with the city of San Jose by investing hundreds of millions of dollars in local infrastructure and people and have become one of San Jose's largest employers. We own more than 1.5 million sq ft state-of-the-art facilities for producing best quality products and improving production efficiency. We have also recently broken ground on a new business park that will continue expanding our design, manufacturing, and business across the Valley. More than 70% of our engineers and employees are based in Silicon Valley, and we assembly and integrate more than 60% of our server and storage systems in the U.S., much higher percentage than any of our largest competitors. I would also like to comment on a recent news story.
We remain confident that recent allegations from a single publication about malicious chips supposedly being implanted on our hardware during manufacturing are not only impossible, but also wrong. Over the years, we have produced millions of motherboards, 1.3 million last year alone. We have never been contacted by any customer with regard to a malicious chip. We have never been contacted by any U.S. or foreign law enforcement or intelligence agent alerting us of malicious chip on our hardware or of any such investigation. We continue to work with our customers to address any security concern and to ensure the quality and integrity of our products. In summary, we are still the fastest growing U.S.-based manufacturer of server and storage. Our first quarter growth of 40% year-over-year is a great start to fiscal year 2019.
Expanding and deepening our customer base with our Resource-Saving system and offering the best quality product for trusted solution will drive our continuous success. I want to thank our entire Super Micro team for staying focused on our goal. Many tech companies have been talking about digital transformation across the enterprise. Super Micro is building it every day. It has been a great 25 years for Super Micro, I am looking forward to continue our journey to bigger success. Now I will hand over to Kevin.
Thank you, Perry and Greg. Thank you, Charles. Today, we issued a press release announcing our solid financial results for the first quarter of fiscal 2019. We also filed a current report on Form 8-K disclosing the company's decision to restate certain prior financial statements. First, I will address the current health of the business by providing an overview of our financial performance for the first quarter of 2019, and I will then make a few comments about the decision to restate those prior financial statements. Supermicro had a strong first quarter of revenue and net profit. As Charles mentioned, we estimate first quarter revenue within the range of $952 million-$962 million. It was approximately 40% higher year-over-year and above our guidance range of $810 million-$870 million. We grew revenue in all market verticals, with key markets growing significantly year-over-year. Global 2000 grew approximately 130% year-over-year.
Internet Data Center grew approximately 150%, while non-Internet Data Center grew approximately 95% year-over-year. Accelerated computing was up 26%, and embedded grew approximately 30%. On a year-over-year basis, the U.S. enjoyed the highest growth at nearly 45%, followed by EMEA, that grew nearly 50%, and Asia PAC, that was up approximately 30%. Other regions grew approximately 15%. Our estimated range of gross margin on both a GAAP and non-GAAP basis was from 13.2%-13.4%. Our customer mix contributed to the rebound in margin this quarter. Compensation costs increased across the board in both manufacturing and operating expense this quarter related to annual merit increases, as well as performance bonuses or profit-sharing payments to non-executives. We also celebrated our 25th anniversary in grand fashion. We estimate non-GAAP EPS range this quarter was from $0.66 to $0.70, more than double year-over-year.
For the first quarter, we estimate cash generated from operations was $50 million. After deducting CapEx of $4 million, we estimate free cash flow of $46 million for the first quarter. This quarter, our cash conversion cycle increased seasonally to 92 days from 82 days in the prior quarter. Both day sales outstanding due to collections and inventory days increased to position stock for the second quarter, was offset by increasing days payable. Our near-term target is to stay in the range of 85 to 90 days for the cash conversion cycle. Let's turn to the progress we are making on the fiscal 2017 Form 10-K. The company has substantially completed its testing and assessment. Today, we announced that we have determined to restate prior period financials and provide an estimated adjusted amounts.
We are in the final stages of preparation and conclusion so that we may continue to work with our auditors to complete our 2017 Form 10-K. The core basis of the restatements remains the timing of revenue recognition. Based on our assessment to date, the company confirms that although in our restated financials, some revenue recognized in prior periods will be recognized in a subsequent period, all revenue from customer transactions in the period subject to the restatement is valid revenue. During our review of prior periods, we also discovered additional errors relating to the classification of certain inventories. The number and breadth of the adjustments, coupled with their aggregate magnitude, was significant enough for us to conclude that restating prior periods was necessary.
To date, we believe total cash flows from operating, investing, and financing have not been impacted, with the exception of certain balance sheet classification errors that have been determined to have an immaterial effect on cash and cash flow from operations. Based on our findings, we expect to report material weaknesses of our financial reporting. We have, depending on the matter, begun remediation measures to varying degrees. Along the way, we have developed stronger revenue policies, trained employees, and developed new standards. There are a number of remediation efforts. Let me share a few examples. We have hired senior revenue talent and grown our revenue team Implemented strong cutoff controls, including walking the shipping dock at the close of the quarter and enhancing our revenue testing. We have revamped the sales sub-certification process at quarter end.
In addition, we have formed a new internal audit team that is conducting testing on the second half of 2018 and absorbing the transfer of knowledge from the efforts of our advisors in the process. Our efforts on completing the filings for fiscal year 2018 have been running in parallel and are well underway. We are working diligently to complete this testing and the rolling of the accounting conclusions from fiscal year 2017 into fiscal year 2018. This should enable us to have the fiscal year 2018 financials, an updated assessment of internal controls over financial reporting ready for audit largely in parallel. Lastly, we are guiding net sales for the second quarter in the range of $830 million-$890 million. We note there is much anticipation around slowed IT infrastructure spending. We have adjusted our guidance accordingly.
Also, we experienced a pause in October from some customers following the unwarranted hardware hacking article. However, we have begun to see those customers returning, but we will not understand the full impact until after the quarter ends. Quarter to date, compared to last year, we are materially ahead on a billings and open order basis. As indicated previously, we will have a Q&A session which sell-side analysts will be permitted to ask questions. I would like to remind you that your questions should be directed to the business update that we've just provided. We may decline to answer questions relating to the audit committee investigation or the delayed filing of our 10-K. Operator, at this time, we're ready for questions.
Thank you, sir. Ladies and gentlemen, our question- and- answer session will be conducted electronically today. To ask a question, firmly press the star key followed by the digit one 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 would like to remove yourself from the queue, please press the star two. Also, if you're on a speakerphone, please make sure that your mute function is disengaged so that your signal can reach our equipment. Finally, we ask you to 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 additional questions.
That is star one if you'd like to ask a question, and we'll pause for just a moment to allow everyone a chance to answer. We'll take our first question from Nehal Chokshi from Maxim Group. Go ahead, sir.
Yes, thanks, congrats on an amazing quarter. 41% year-over-year growth on top of 26% year-over-year growth from the prior quarter. That's massive. A 15% revenue beat. Congratulations, especially in the face of that Bloomberg Businessweek article. Could you provide what was the year-over-year growth for components and revenue and the percent mix between those two? I'm sorry, between components and systems.
Yeah, just one second.
Nehal, this is Perry. The systems was 84% of total revenue.
Okay, how much did that grow year-over-year?
Well, it was consistent with last quarter. I think probably we need to look that one up and get back to you later.
Okay, all right. Kevin, you talked about that the guidance reflects a slowing down IT environment as well as potential impact from the Bloomberg Businessweek article. There's no potential there having been demand pulled in from the December to September quarter that's also part of that weakened guidance, it's completely the first two items that you talked about?
Well, I think there's also possible speculation that customers could have potentially ordered early to try and beat tariff. We don't have specific evidence of that, but that could be possible.
Okay, thank you. I'll get back in the queue.
Thank you again. That's star one to ask a question, we'll pause for just a moment to allow everyone a chance to signal in. Once again, as a final reminder, that's star one for questions. We'll take a follow-up question from Nehal Chokshi with Maxim. Thank you.
Thanks. All right. The $50 million cash from operations, that's very impressive. You mentioned that there was a 10-day increase in the cash conversion cycle, which is indeed seasonal, but I would have expected there would have been a significant consumption of cash then. What was the balance sheet items that did actually enable the generation of cash?
Yeah. We're not disclosing too much more. I think one thing that has helped, I've mentioned this before, is that our shipment linearity is much better now, that we're shipping more early in the quarter and have that opportunity to kind of collect that. I think that's a good portion of that.
Got it. Okay. Finally, with respect to the 8-K that was filed, that shows the ranges of likely restatement, it looks like to me there's about a net $50 million of revenue that's shifting out from those periods of fiscal year 2015 to fiscal year 2017, into fiscal year 2018 and beyond. Is that a correct characterization? I do recognize that that's really only 1% of revenues. Just want to make sure I'm understanding that correctly.
Yeah. As it relates, if you're trying to understand what impact there will be on fiscal year 2018, that would be limited to the table that's shown in fiscal year 2017. Do recall that I mentioned that we would be continuing to apply the same procedure as the fiscal year 2018, there will be a continued roll effect.
Okay. Finally, if I look at the net income that's being shifted out, that's $10 million. If you take that $10 million, divide that by $15 million, that's about, what, I think 13% net income ratio. That's much higher than what your corporate average was during those periods. What's the explanation for why it seems like the revenue that's being shifted out tends to be higher net income margin?
Yeah. I think there's other elements in that reduction of income. If you remember, we said that the primary effects are related to sales as well as inventory. To the extent that there are inventory debits, those won't move into fiscal 2018.
Okay. All right. Thank you. That's it for me. Thank you.
Nehal? Nehal?
Yes.
Before you go, the system revenue last year, in the same quarter, was 75%.
Okay, great. Thank you very much.
Thank you. Once again, that's star one for questions. Next we'll go to Hosseini with Susquehanna.
Hi. Thanks so much for taking the question. David Ryzhik here for Mehdi Hosseini. Would love to dive in a little more on storage. Can you remind us what you said around next gen storage, what the growth rate was, and some of the trends you're seeing there? I had a follow-up.
Yeah. We see people really moving NVMe much aggressively now. Storage issue, but I'm not going to continue long.
Great. What was the growth rate again?
I'm looking at my notes. I see we didn't share that. It's over 50%.
Okay. Storage as a whole or next gen storage?
That's storage as a whole.
Understood. Would love to get your thoughts on the memory components and impact to margins. It seems like things are obviously easing. It was a headwind before. Just how are you guys thinking about the impact of DRAM and NAND flash pricing, moving forward and the impact to your business?
Yeah, very good question. We expect both SSD, NVMe price will continue to be lower and DRAM price should become softer and softer in the next few quarters. From this point of view, we believe our profit margin will be keeping the same as before or slightly better. However, the revenue may be slightly lower because the cost for memory and flash are lower. Basically, it's a good sign to us, basically.
Okay, great. Just for the outlook for the December quarter, what specifically have you heard? Is it just broader macro, or is it specifically based on just some customer conversations that you've had that has resulted in the lower outlook?
I would rather say major is the macro business. IT industry looks like may slow down a little bit over worldwide.
Just lastly, one of your customers in IDC for a while had announced a big acquisition in the cloud space. Just wondering if you view that as an opportunity for Super Micro going forward. Just any thoughts on how that shapes up for you?
Yeah. For those changes, basically, we feel it's positive to our business.
Thank you so much. Thank you.
Thank you.
Next we'll hear from John Lopez with Vertical Group.
Hi, good evening. Can you hear me okay?
Yes.
Okay, great. Thanks. I'm wondering, you made a comment in the prepared remarks relative to, it was some reference to orders or perhaps billings measured year-over-year that you were tracking comfortably ahead. Would you mind just fleshing that out a little bit? Just what are you referring to there and just maybe some level of magnitude, just even ballpark on a year-over-year basis?
What we were trying to share was that, if memory serves me, we did roughly about $851 million in the quarter a year ago, and our guidance is slightly above that range. What we were trying to differentiate here was that given there were macro considerations that Charles mentioned, as well as we've had the Bloomberg impact. The other key thing that we wanted to share is that even though our guidance range is still within that metric as compared to last year, our quarter-to-date progress is ahead of that. We think that is healthy ahead, but we're not going to give a specific metric.
Okay, understood. I apologize. What you're effectively trying to communicate is the business is sort of running better than what the year-over-year guidance implies, and you're leaving yourself some wiggle room to account for macro considerations, et cetera?
We're saying that we have better identification than last year as it relates to getting to $850 or $860 or whatever within our range.
Okay, understood. The second question, could you just also flesh out a little bit the comments you made around the article and maybe specifically just maybe offer a bit of a cadence. I'm assuming that there was a sort of an all-hands-on-deck scramble period there directly after the article. If you can walk us through how the interaction has been and just share any anecdotes or offer a little bit more detail around the idea of customers perhaps starting to migrate back as that has sort of appeared to have been largely a non-issue. Could you just maybe spend a second on that? Thanks.
Yeah. We're not going to get ahead of ourselves in that. I think we've had communications directly with customers, and the way that we feel about the business is in relation to those discussions with customers.
Yeah. From a couple of our announcements, we don't believe it happened to our hardware. Basically, we don't believe that malicious chip.
Understood. I guess what I'm just trying to get a little better sense for is, was there a period of complete freeze up around sort of customer dialogue that then thawed out pretty fast, or was there not that? I guess I'm just going to try and get a characterization here now that we're sort of two months out from that. If you guys sort of have a feel that the crux of that problem has largely moved past you. I understand there's some uncertainty left. I'm just trying to get a sense for progress Twin point A and point B.
I would have to say, we don't believe there is such a spy chip. Most our key customers don't believe that, too. At this moment, we feel pretty comfortable for the future business.
Understood. Last question, I apologize. On the December guide, can you just offer some qualitative commentary around the cloud vertical? It's obviously been very strong for a couple of quarters. I'm just wondering, are you guys factoring in some easing, whether that's project related or potentially pull forward related or just any characterization as to what that specific segment is doing as you go from calendar Q3 to calendar Q4?
We don't provide forward guidance by market vertical.
Understood. Is it too much to ask just to say whether it be up, down, or flat?
I'm not sure what you're trying to get at.
I'm just trying to get a sense.
Basically, we believe the macro IT business may slow down a little bit based from a lot of our vendor, our competitor, and industry analysis result. Our business stay healthy.
Okay, thanks. Just so it's clear what I'm trying to get at, that business tends to be a little bit more lumpy and project related and sometimes travels independent of macro. It's been very strong for a couple of quarters. I was just trying to get a sense for whether you had some temporary pause in some activity that may be contributing to what you're seeing in December.
Assign it to macro.
Thanks so very much for all the thoughts. Really appreciate it.
Yeah. Thank you.
At this time, it appears we have no further questions in the queue. I'd like to turn the call back over to Mr. Liang for any additional or closing comments.
Thank you for joining us today, and have a great day. See you next quarter.