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.
But the entire call is open to all participants on a listen only basis. As a reminder, this call is being recorded, Thursday, November 15, 2018, A replay of the call will be accessible until midnight, Thursday, November 29, 2018. By dialing 1 8445122921 and entering the replay pin 300 1732. International callers should dial 1412317 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.
And 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 30, 2018. During today's conference call, Super Micro will address the company's efforts to become current with its SEC filings, the business end market trends from the 1st 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. And 8 K filing that were distributed at the close of regular trading and are available on the company's website. Before we start, I'll 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 earlier SEC filings 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 Leon, Chairman and Chief Executive Officer.
Thank you, Perry, and good afternoon, everyone. Let me go through the comment briefly. On our first quarter performance. Our first quarter revenue will be in the range of $952,000,000 to $962,000,000, which surpass our quarterly guidance and represents approximately 40% increase year over year. Our momentum in mass verticals continue with strong growth, especially in Global 2000 storage and AI machinery.
Computer system revenue was consistent with last quarter as approximately 84% of revenue and up 56% year over year. Our mobile ASP grows continue with higher add value sales 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 few years. Within our Global 2000 cities, which grew 132% year over year. Nagrisso's 7 architecture have been a key message of their focus.
Leveraging our breakthrough product and further to market advantage to deliver significant savings to customers. We have achieved very successful with companies like NASA, Intel and many other industry leaders. The resource saving architecture reduced TCE total cost to the environment, which brings significantly TCO savings, along with environmental benefits. The Resource savings Super Bray and microarray this aggregated design enables the independent upgrade of system components. By not repeating and replacing the entire hardware system.
Directing the customers can save up to 60% in system refresh cost and reduce. I think it was up to 50%. The resource savings between product line fully optimize power saving design, back free air cooling, including shared power and cooling to deliver double digit improvement in power efficiency over traditional service. The house swap NVMe that inside support together with the resource saving feature. Next between one of the highest volume server platforms in the industry today.
We launched several 1 new petascale whole flash NVMe system that when combined with high performance fabrics and open rack scale management software can be used to dynamically Corvision Critical Assets, O Fresh NVMe, GPU's and LPGS reducing global provisioning saving costs and reducing e waste. We had a broadest portfolio of old fashioned MREL system with more than 150 system models available, making Chibomacro a benchmark leader in storage. With that story was again one of our strongest segment that drives revenue across multiple verticals including Global 2000 and Next Generation Storage. This SMS Storage solution provide a real time to value competitive advantage for users with data intensive workload like a big data, autonomous training, AI, and HPC applications against traditional FSP. We recently launched Obranch32 hash off of our EPS FF driver.
In the high density 1U system designed to be either the way for NVMe technology. I don't know what's being there. This new solution will support a full kilobytes of high performance old flash storage in one year with an outstanding 13,000,000 IRAP and 52 gigabytes per second throughput. Samsung has also partnered with to develop a 1 new NF1 story. So featuring the most power efficient, high bandwidth, low latency, next generation storage technology, which is the highest storage latency.
And better IRAP performance currently available on the market, deeper learning, machine learning, and artificial intelligence solution grew very well and was up 26% from last year as a supercomputing company in Dallas text us this week. We showcase our cloud server based on our NVIDIA HDX2 platform. The super server 1920 9 GP combined 16 Tesla V 130 two gigabyte Xm3 GPU connect via MBDink and MSC to work as a unified to pair up accelerator with half a terabyte of aggregate memory to deliver a major computing power. Moreover, our new super server 6049 GP is optimized for our modern AI inferences. This value system achieves maximum GPU based and performance, which is a powerful up to 20 iridium tesla T4 GPU with Turing TESO core technology.
Now let me move to other business highlights. In September, Q4 Magazine operates our 25th anniversary. The company was founded in San Jose, California in 1993 in the heart of Citycon Valley. Over the last 25 years. We have grown from a silicon valley staff to a Fortune 1000 company corporate leader.
As we had grown, we had built our fair with the city of San Jose. By investing 100 of 1,000,000 of dollars in local infrastructure and people and have become one of some of the largest in per year. We own more than 1,500,000 square feet stabilized facility for producing basic quality products and improving potassium efficiency. We have also recently broken ground on a new business path that will continue expanding our design manufacturing and business across the valley. More than 70% of our engineers and employees are facing Silicon Valley.
And we assembly an integrated more than 60% of our server and storage systems in the U. S. Much higher percentage than any of our largest competitor Finally, I would also like to comment on a recently news story We remain confident that raising the allegation from a single publication of our malicious II support study been imprinting on our hardware during manufacturing and not only impossible, but also over the year, we had produced 1,000,000 of amount of dollars, $1,300,000 last year alone. Yet we have never been contacted by any customer with regard to malicious chip. Also, we are never being contacted by any US or foreign law enforcement for intelligent agents alerting us of Malaysia's chief on our hardware or of any such investigation We continue to work with our customers to our trade and security concerns and to ensure the quality and integrity of our products.
In summary, we have seen our fastest growing U. S. Base manufacture our server and storage. Our 1st quarter growth of 40% year over year. Is a great start to fiscal year 2019, expanding and deepening our customer base with our resource savings system and opening the best quality product for trusted solutions.
Will drive our continuous success. Also, I want to thank our entire Ciplo Mega team for painful is on our goal. Many tech companies have been talking about feature transformation are closed by enterprise. Chupromicro is building it every day. It has been great 25 years for Chupro Micro and I am looking forward to continue our journey Thank you, Perry, and good.
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 Eight 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.
Super Micro had a strong 1st quarter of revenue and net profit. As Charles mentioned, we estimate 1st quarter revenue in the range of $952,000,000 and above our guidance range of $810,000,000 to $870,000,000 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, and Asia Pac that was up approximately 30%. Other regions grew approximately 15%. Our estimated range of gross margin on both 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 $50,000,000 after deducting CapEx of 4,000,000 we estimate free cash flow of $46,000,000 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 collection and inventory days increased to position stock for the second quarter offset 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.
Now let's turn to the progress we are making on the fiscal 'seventeen 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 provided 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 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, the number and breadth of the adjustment 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 develop new standards. There are a number of remediation efforts. Let me share a few examples We have hired senior revenue controls, including walking the shipping dock at the close of the quarter and enhancing our revenue testing. And team that is conducting testing on the second half of twenty eighteen and absorbing the transfer of knowledge from 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 'eighteen.
This should enable us to have the fiscal year 'eighteen financials and updated assessment and internal controls over financial reporting ready for audit, largely in parallel. Lastly, we are guiding net sales for the 2nd quarter a range of $830,000,000 to $890,000,000. We note there is much anticipation around slowed IT infrastructure spending. And 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 and 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,
We will take your questions in the order Also, if you're on a speakerphone, please make sure that your mute function is We will then come back to you for additional questions. And we'll take our first question from Nehal Chokshi from Maxim Group. Go ahead, sir.
Yes, thanks. And congrats on an amazing quarter. 41% year over year growth on top of 26% year over year growth prior quarter, that's massive and a 15% revenue beat. So congratulations, especially in the face of that Bloomberg business week article. Could you provide some what was the year over year growth for the components and revenue and the percent mix between those two?
I'm sorry, between components and systems?
Nehal, this is Perry. The systems was 84% of total revenue.
Okay. And how much will 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. And then, Kevin, you've talked about that the guidance reflects slowing down the IT environment as well as potential impact from the Bloomberg Business Week article. So there's no potential there having been demand pulled in from the December to September quarter. That's also part of that weakened guidance or it's completely the first two items that you talked about?
Well, I mean, I think there's also situation that customers could have potentially ordered early to try and beat tariffs. We don't have specific evidence of that, but that could be possible. Okay. Thank you.
For questions. We'll take a follow-up question from Nehal Chokshi with Maxim. Thank you.
$50,000,000 cash from operations are very impressive. And 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. And so what was the balance sheet items that did actually enable the generation of cash?
Yes. We're not disclosing too much more. I think one thing that has helped. And I've mentioned this before is that our shipment linearity is much better now so that we're shipping more early in the quarter and have that opportunity to kind of collect that. So I think that's a good portion of that.
Got it. Okay. And then finally, with respect to the AK that was filed that shows the ranges of likely restatement. It looks like to me there's about a net $50,000,000 of revenue that's shifting out from those periods of fiscal year 2015 to fiscal year 'seventeen into fiscal year 'eighteen and beyond. Is that a correct, current, current position?
I do recognize that that's really 1% of cumulative revenues, but just want to make sure I'm understanding that correctly.
Yes. So as it relates, if you're trying to understand what impact that will be on fiscal year 2018. That would be limited to the table that's shown in fiscal year 2017. And then do recall that I mentioned that we would be continuing to apply the same procedures to fiscal year 'eighteen. So there will be
a continued gold effect. Okay.
And then finally, if I look at the net income that's being shifted out, that's 10,000,000 So if you take out $10,000,000 divided by $60,000,000, that's about what, I think, 13% net income ratio, that's much higher than what your corporate average was during those periods. So what's the explanation for why it seems like the revenue that's being shifted out tends to be higher net income margin?
Yes. So I think there's, 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. So 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.
Hey, Hal. Hey, Hal, good morning. Yes. The system revenue last year in the same quarter with 75%.
And next we'll go to Jose Nee with Susquehanna.
Hi, thanks so much for taking the question. David Ryzhik here for Mehdi Hosseini. Would love to dive in a little more in 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? And I had a follow-up.
Yes, we see people really moving MEME much aggressive now. So, our story is still dynamic if the container is strong.
Great. What was the growth rate again?
I'm looking at my notes. I see we didn't share that. It's over 50%.
Storage as a whole or next gen storage?
That's the storage of the home.
Understood. And would love to get your thoughts on the memory components and the 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?
Yes, very good question. We expect both SSC NVMe price will continue to be lower. And so as the year end, a price to become shorter and shorter in the next few quarters. So from this point of view, we believe our profit I mean, the profit margin will be keeping the same as before or slightly better. However, the revenue may be slightly lower because of course for memory and fresh lower.
Basically, it's a good sign to us, basically.
Okay, great. And then just for the outlook, for the December quarter. What specifically have you heard? Is it just like just broader macro or is it specific Is this specifically based on just some customer conversations that you've had that has resulted in the lower outlook?
I would have to say major is the mega business. The IT industry looks like may slow down a little bit over quarter
And just lastly, one of your customers in IDC for a while had announced a big acquisition in the cloud space. Just wondering if that if you view that as an opportunity for Supermicro going forward just any thoughts on how that shapes up for you?
Yes. I mean, for those changes, basically, we feel it's positive to RPD.
And next we'll hear from John Lopez with Vertical Group.
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 on year that you were tracking comfortably ahead Would you mind just flushing 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 on year basis?
Yes. So what we were trying to share was that if memory serves me, we did roughly about 800 $51,000,000 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. And, we think that is healthy 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 on year guidance implies and you're leaving yourself some wiggle room to account for macro considerations, etcetera?
We're saying that we have better identification than last year. As it relates to getting
Okay, understood. The second question, could you just also flush out a little bit the comments you made around the article And maybe specifically, just maybe offer a bit of a cadence, like I'm assuming that
there was a sort of an all hands
on grumble period there directly after the article, but 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 a largely a non issue Could you just maybe spend a second on that? Thanks.
Yes. So, 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 those discussions with customers. Yes. But from our couple of
from couple of our announcement, we don't believe it happened to our hardware. And so basically, we don't believe that a malicious chip.
No, understood. I just what I'm just trying to
get a little bit
of sense for is, was there a period of like complete freeze up around sort customer dialogue that then thought out pretty fast? Or was there not that? I mean, I guess I'm just trying to get a characterization here now that we're sort of 2 months out from that if you guys it's hard to have a feel that the crux of that problem has largely moved past you. I understand there's some uncertainty left, and I'm just trying to get progress between point A and point B?
I would have to say, I mean, we don't believe they are such a spreadsheet. And most of our key customers don't believe that too. So, at this moment, we feel pretty comfortable for the future BD.
Okay. 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.
And I'm just wondering, are you guys factoring in some easing, whether that's project related or potentially pull forward related, just any characterization as to what that specific segment is doing as you go from calendar Q3 to calendar Q4?
Yes, we don't provide forward guidance by market vertical.
Understood. Is it too much to ask just to say whether it would be up down or flat?
I'm not sure what you're trying to get at. I'm just trying
to get I'm just trying to get I'm just trying to get Basically, we believe, basically, we believe, with a make whole, the macro ITP needs to slow down a little bit based from a lot of our vendor, our competitor, and industry analysis without. But how can you 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. So 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?
That's fine. It's a macro. Okay. Thank you.
And at this time, it appears we have no further questions in the queue. I'd like to turn the call back over to Mr. Leon for any additional or closing comments.
Thank you for joining us today and have a great day. See you next quarter.