Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. First Quarter Fiscal 2018 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 Tuesday, August 21, 2018. The replay of the call will be accessible through midnight, Tuesday, September 4, 2018 by dialing 1-844-512-2921 and entering replay PIN 3269159. 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 afternoon, thank you for attending Super Micro's business update conference call for the fourth quarter fiscal 2018, which ended June 30, 2018. During today's conference call, Super Micro will address the current state of the company's efforts to file its delinquent SEC filings, the business and market trends from the fourth fiscal quarter of 2018, and the company's estimated financial results for the fourth quarter and for fiscal year 2018. 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 two news releases from the company 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, our most recent Form 10-K, 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 net leaks. At the end of today's prepared remarks, we will have a Q&A session, which sell-side analysts will be permitted to ask questions. I'll now turn the call over to Kevin Bauer, Chief Financial Officer.
Thank you, Perry, and good afternoon. Today is a frustrating day because our very good quarterly results are overshadowed by the news of our filing status. We remain undeterred in our efforts to complete our financial reports. We have worked diligently and deployed significant resources towards completing the 2017 and 2018 financial statements, but are not able to file by the deadline of August 24th, 2018. This was the deadline given to us by the Nasdaq appeal panel when they granted the company an exception to the listing standards requiring timely filing of SEC reports. We have made tremendous progress on this matter, having completed the analysis of specific revenue transactions identified through our audit committee's investigation.
To date, our cash flows have not been impacted by our findings, and no transaction reviewed by the company as part of this process has involved revenue that could not ultimately be recognized, nor have we concluded that a restatement of financial results is necessary. The question you must be asking is, why is this matter taking so long? The answer is that in order to be thorough, we are reviewing transactions near the end of each quarter for similar issues found in the earlier testing, but particularly as it relates to the matching of purchase order and shipping terms to the timing of revenue. As we are a high-volume business, this entails locating documentation that is on-site, archived, or at third parties, and reviewing thousands of revenue transactions in detail using a structured approach. There are a number of issues.
Let me share an example of an issue that has arisen in our reviews. We have from time to time offered free shipping to customers, even though terms of our agreements with those customers provided that the customer would arrange for its own shipping company to pick the products up at our factory shipping dock. This practice had the unintended accounting consequence of converting the transaction from an Ex Works transaction to an FOB transaction. If end-of-quarter shipments are adjusted in this way, it can cause the appropriate date for recognizing the revenue for those shipments to slip from one quarter into the next. This is one example of what we are looking for as we review thousands of transactions. The company believes the revenue recognized for reviewed transactions is valid revenue. The main issue is the quarter in which revenue must be recognized.
We have not yet determined whether the magnitude of any timing adjustment will be material to any of our previously filed financial statements. We continue to work diligently to complete the review, assess the impact, and complete our financial statements and assessment of internal controls over financial reporting. We have engaged KPMG to assist us with our review, and we are also working closely with our independent auditors, Deloitte, to complete the job. We appreciate the efforts of both KPMG and Deloitte. We are also working closely with the agent of our bank group to inform on the testing process as well as our progress towards completing all the SEC filings. As a result, we expect to continue to have adequate lines of credit to fund the continued growth of the company.
We're not able today to suggest a date by which we will complete this review and file all our delinquent SEC reports, but we believe that date is not too far in the future. Thankfully, however, our business remains healthy and has grown during this time as a result of our fourth quarter filing. Turning to a brief overview of our financial performance during the fourth quarter of 2018, Super Micro had strong fourth quarter revenue and net profit. We estimate fourth quarter revenue was in the range of $986 million-$996 million. It was approximately 39% higher year-over-year. With this strong quarterly revenue, we achieved a fiscal year revenue of approximately $3.3 billion. We estimate fourth quarter non-GAAP fully diluted earnings per share within the range of $0.75-$0.79. We grew revenue in all market verticals, with key markets growing significantly year-over-year.
Global 2000 more than tripled year-over-year. Internet data center more than quintupled year-over-year. Non-internet data center grew nearly 50% year-over-year. Accelerated computing was up over 90%. Embedded grew 20%. Storage and channel were up 9% and 3% respectively. On a year-over-year basis, the U.S. enjoyed the highest growth of 48%, followed by EMEA that grew 28%, Asia PAC that was up 24%. Other regions grew 56%. Our estimated range of gross margin on both the GAAP and non-GAAP basis was from 12.8%-13%. Our customer mix primarily affected margin this quarter. We estimate non-GAAP EPS range this quarter was $0.75-$0.79, which was a record high and almost double year-over-year. For the fourth quarter, we estimate cash generated from operations was $38 million.
After deducting CapEx of $8 million, we estimate free cash flow of $30 million for the fourth quarter. Last quarter, we mentioned our effort to manage our working capital. This quarter, we reduced our cash conversion cycle to 82 days from 99 days in the prior quarter. We achieved improvements in day sales outstanding due to collections and improved shipment linearity and reduced inventory days by being more precisely timing purchases that was offset by reducing days payable. All in all, our business is strong, and we improved performance while working diligently to become current on filing our financial reports. Let me now turn it over to Charles for his comments.
Thank you, Kevin, and good afternoon, everyone. Despite our substantial efforts and progress to completing our SEC filings, I'm very disappointed that we did not meet the filing deadline. Personally, I cannot convey how much pain I feel in this unfortunate development. This, however, did not affect my confidence in Super Micro's strong foundation. In the meantime, we are achieving record high revenue and profit and are continuing to introduce new unparalleled product innovation. We are committed to completing our SEC filings as soon as possible and making sure this problem will never happen again. Completion of the audit is the first step. We have been investing to further improve our people's skills, process, and tools to meet the highest financial standard and to meet the needs of a rapidly growing USA-based global technology company.
We need to make sure our infrastructure has a strong effect that accelerates our growth and deliver flawless customer experience. A change is being made and already improve our business operations. We have added new management across the business and financial operations of the company. My enhanced team brings a wealth of industry knowledge and experience in large scale operations. We have also added a new chief compliance officer and a new vice president of internal audit and strengthen our revenue recognition team. Our core business has grown over 31% in the last year, despite the disruption caused by the continued delay to our 10-K filing. To date, Super Micro's business and product technological leadership has never been stronger. Our fourth quarter revenue was in the range of $986 million-$996 million, approximately 39% higher year-over-year and was a new record high.
With this strong quarterly revenue, Super Micro surpassed $3.3 billion for fiscal 2018. Record revenue and profit are strong indicators of the continuous success of our products and market focus. We continue to expand our technology leadership with new products that deliver game-changing performance. Our multiple node BigTwin system saw tremendous uptake from hyper-converged systems and big data applications. For AI machine learning, we have partnered with NVIDIA to build the world's most powerful platform that combines 16 Tesla V100 GPUs into a 2 petaFLOPS super server. Partnering with Intel, we delivered a new class of high data throughput, very low latency storage product line that can deliver up to a petabyte of high-performance all-flash NVMe storage in a compact 1U system, and can deliver up to 18 million IOPS. I am more confident about our business and technical opportunities than at any time in our 25-year history.
We are fully focused on meeting our obligations for SEC reporting and operating a world-class business. We have many great things going on at Super Micro as we continue to bring to market our new innovations. The resource-saving technologies are enabling great opportunities for us, especially for the upcoming 5G transition, Enterprise Global 2000, and AI machine learning. I look forward to sharing more of these exciting opportunities with you in future quarters. Now, I will hand over to Kevin.
As indicated previously, we will have a Q&A session where 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 have just provided. We may decline to answer questions relating to the audit committee investigation or the delayed filing of our 10-K because of pending litigation. 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 key followed by the digit 1 on your touchtone 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 star 2. Also, if you are on a speakerphone, please make sure that your mute function is disengaged so 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 come back for your additional questions. Again, that is star 1 if you'd like to ask a question.
We'll go first to Nehal Chokshi with Maxim Group.
Thank you, really phenomenal results. Kevin, as you know, the stock is reacting to the delayed filing and really great color on some of the examples that's going on. You made a statement at the end that you believe that the ability of filing these filings is not too far away, but in the 2nd press release of the day, it does say that there's still significant work to do. Can you help bridge the delta between the verbal comment and what's in the filing and what's the 10-K?
Yeah. I think it is true that we still have a substantial amount of work to do. I think what we said in terms of being able to see it in the future is that now that we are later in the process, we actually have pretty good visibility on what it takes to remain to be able to complete the process. That's how I would string them together, is that it's 1 of better visibility, but there's still a fair amount to do.
Okay. The process that was defined on what needs to be done to review a transaction was established relatively late relative to when the investigation started about a year ago. Is that fair to say?
Well, certainly as the results of the investigation came in, we were able to see a little bit more in terms of the processes that we were needing to do, so certainly it was evolving.
Okay. Just to be clear, you said significant transactions left to review, you've already reviewed hundreds of transactions. Are you only a fraction of the way through? Are you 10%-20% the way through? Are you more like 80%, 90% the way through of what needs to be reviewed?
Yeah, we really can't go into that level of detail. What I can share with you is that we've taken the approach of largest transactions and are now going towards smaller transactions.
Okay, understood. On to the fundamental stuff. At the midpoint for the June quarter, you had 25% Q over Q growth, and that's about 1,000 basis points above your typical seasonality. You did see gross margin tick down a bit Q over Q. Can you parse that between potential drivers of mix, component input cost, competitor pricing, and then an upside lever that all these three should be also offset, I think should have been volume as well. Maybe you can also comment on how much of a positive effect volume would have been if the other three items were held constant.
Whew. That's a lot. I'll tell you that we are certainly aware of the fact that the industry is growing. We are benefiting from that. We are happy with the significant enterprise wins that we are getting. I will share with you that as I looked at the margin mix, a lot of it had to do with just a quarter-over-quarter mix in terms of some of our customers. Some of that is related to the products that they buy. Others are related to the aggressiveness sometimes that we have on larger deals. I think those were the two primary factors.
Would you say that the pricing environment has become more competitive relative to a quarter ago?
I wouldn't say that universally, no.
Okay. Thank you. I'll get back in line. I do have a lot more questions, but I want to let other people ask questions. Thank you.
Thank you.
We'll go next to Aaron Rakers with Wells Fargo.
Hi, this is Jake Wilhelm on behalf of Aaron Rakers. Congrats on the strong results. I was wondering if you could give me some color on what you're seeing with AMD's traction with their EPYC power line.
You see the AMD product has been getting popular, and we ship kinds of much more product than last quarter. The trend should be continuing.
Thank you. I was also wondering if you could give me some color on Intel's Optane product and the traction you're seeing around that with Intel's 10 nanometer challenges.
We continue to ship Intel Optane technology. Again, back to what you know, people want a lower latency, higher bandwidth. Optane technology provide excellent solution in that area. We have a great product line, one of the earliest player in the market. As to 10 nanometer technology from Intel, as of this moment, we try to observe, overall, we feel very optimistic still.
Great. Thank you so much.
Thank you.
Again, it's star one if you would like to ask a question. Let's go to the phone line for Nehal Chokshi with Maxim Group.
All right. Thanks. Your midpoint guidance is down 15% quarter-over-quarter, which is 1,000, 1,500 basis points more than what I would consider seasonal. Can you give some color as far as what's below seasonal guidance? Obviously, you did have some incredible quarter-over-quarter growth over the past few quarters, but just want to make sure there's nothing more to it than that.
No, I think our primary view of this quarter is really seasonal. I don't think there's anything unusual as it relates to the guidance. Hopefully we'll do well.
We saw guidance end of Q2, end of 2017, indeed show this quarter, September quarter, will be still a strong quarter basically.
Okay. non-GAAP OpEx plans for September quarter, can you give any color there?
Yeah. We're not giving any guidance other than revenue at the moment.
Okay. All right. Are you going to be able to provide us some color on the system volume, system ASP, node volume, and node ASP for the June quarter?
No.
Okay. All right. That's it for me then. Thank you.
Thanks.
I'll go next to Jon Lopez with Vertical Group.
Hi. Thanks. I'm wondering if you could just spend a moment, because it's not really that apparent to me by the wording that you offered in the release. Specifically, you reference in the second press release the review of hundreds of transactions, then in the same sentence, the conclusion that you don't believe a restatement is necessary. I guess what I'm hoping you can expound upon a little bit is, what exactly have you found as you've gone through these hundreds of transactions, and what are the points of focus, and what in that work has led you to conclude that a restatement is not necessary? Then the last part of that, what would make you conclude prospectively that one might be necessary?
The predominant pattern that we're seeing is that there are ins and outs across the quarters. So far, they've kind of netted each other out to a great degree, and that's really what the primary modus operandi is.
Okay. Could you just speak a little bit more to the progression of that analysis over the period that you referenced, i.e., fiscal 2015 through 2017? I mean, is it fairly uniform across those periods, or do you see more congestion in one period versus another?
Yeah. Really can't speak to that. By virtue of the fact that there's not been significant distortions, it doesn't say that there's a big difference in the pattern.
Okay. Understood. The second clarification I was hoping you could offer is, you don't reference fiscal 2018 at all, and I understand that's not a period that you've provided SEC filings, but are you reviewing transactions for FY 2018 as part of this as well, or has FY 2018 been, for lack of a better term, immunized just based on some of the focus and activities that went into motion when you discovered this issue?
Well, I can share with you that as we've gone through the year and things have come to light from the investigation, we have had our eye on that as it relates to how we have estimated the quarters over 2018. We have incorporated some of that. We still will have to go through the transactions at the end, but we've been improving as you go, so to speak.
Understood. The next question I had was just your commentary around the credit lines. My recollection, and it's a little foggy, my recollection is that there was some contingencies tied to the filing of the SEC documents. Can you just revisit that topic quickly? Are there procedures, or do you have to go through separate processes on the credit side now that this deadline won't be met? What would be the timeframe over which those would be transitioned to outcomes?
Yeah. The credit line, the way that it was structured is that it was a one-year term. If you remember, we closed this in April. Therefore, it had one-year term or completion of our delinquent filings. Upon the earlier of one of those dates, we would be able to convert it into phase two. That phase two actually allowed for an expanded credit facility. That's the nature of it.
contingent.
That's right.
No, that's right. That could change. Your access to credit could change, I suppose, is what's driving that. It sounds like what you're saying is that you still have some amount of duration on that one-year term?
That's correct.
Okay. Sorry, could you just remind, approximately when does that duration end?
It's like the third week of April, I believe.
2019.
Yeah, 2019.
Okay, understood. At that point, if for whatever reason the situation is not resolved, then there would be a separate process you'd have to undertake from that perspective.
Yeah, we're getting a little ahead of ourselves.
Thanks. Sorry, just a couple of questions on the business real quick, if you wouldn't mind. Can you guys just offer a rough split between what your server systems business did in June relative to the accessories portion of the business? Or the subsystems, excuse me.
Yeah. Our system business was roughly about 84% in the last quarter.
Okay, 84%. Would you expect a material change in the segment splits looking into September?
The system business will continue to grow strongly.
I'm sorry, the systems business will continue to outgrow the subsystems business?
You're talking amongst verticals?
No, I was really just looking at the split between the two reportable segments. You have a server system segment, and you have your subsystems business. The other 16%, I'm just asking, as we go into from June into September, are you anticipating any kind of sizable shift between those revenue buckets?
No. It's been a slow increase towards systems, and it would continue to have that kind of movement.
Okay, understood. Sorry, the last question on the gross margin side. I think I heard what you said earlier. I guess I'm just looking for a little bit more on trajectory. You've obviously seen some portions of the component bill of material become a little bit more favorable. Your gross margin obviously went the other way. It sounds like that was vertically related. I'm assuming that was hyperscale to an extent. As we just think about the next several quarters, to the extent that bill of materials buckets continue to trend favorably, is there a reason that you wouldn't expect your gross margins to begin to trend back up toward the mid-thirteens, low fourteens? I'm not asking you to quantify that range. I'm just saying directionally, would you expect improvement as the cost side continues to be a bit more favorable?
Modest improvement over time.
Okay, thanks.
It appears at this time we have no further questions. I would like to turn the call back over to Mr. Liang for any additional or closing comments.
Thank you everyone for joining us, and see you very soon. Thank you. Have a great day.
Thank you, ladies and gentlemen. That does conclude the Supermicro's fourth quarter fiscal 2018 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.