Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. third 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 in a listen-only basis. As a reminder, this call is being recorded Thursday, May 3rd, 2018. A replay of the call will be accessible until midnight, Thursday, May 17th, 2018 by dialing 1-844-512-2921 and entering replay pin 2,033,880. 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, and thank you for attending Supermicro's business update conference call for the third quarter of fiscal 2018, which ended March 31st, 2018. As announced in our press release earlier today, the company has completed the previously disclosed investigation conducted by the audit committee. In furtherance of the preparation of the financial statements, the audit committee is overseeing additional testing that the company believes is nearing completion. To date, the company's cash flows have not been impacted by the findings of the investigation or the additional testing. Additional time is required to analyze any impact of the results of the investigation and additional testing on the company's historical financial statements, as well as to complete additional reviews before the company will be able to finalize its annual report on Form 10-K for the fiscal year ended June 30th, 2017, otherwise known as the 2017 10-K.
The company presented an updated compliance plan to the Nasdaq Hearings Panel on April 26th, 2018. The company requested an additional exception period for continued listing of its common stock on the Nasdaq Global Select Market through August 24th, 2018, in order for it to complete and file its 2017 10-K and subsequent delinquent SEC quarterly filings. The company is unable, at this time, to provide a date as to when the 2017 10-K will be filed or to predict whether the company's historical financial statements will be adjusted, or if so, the amount of any such adjustments. The company intends to file its quarterly reports on Form 10-Q for the quarters ended September 30th and December 31st, 2017, March 31st, 2018, promptly after filing the 2017 10-K.
Based on these delays, during today's conference call, Super Micro will address business and market trends from the third fiscal quarter of 2018 and will discuss estimated financial results, but reference 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 today's news release 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 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 outlooks. 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. Questions should be directed to the company's business update covered in today's call. The company will not address any questions regarding the audit committee investigation or the delay in the filing of the company's 10-K. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.
Thank you, Perry, and good afternoon, everyone. Let me summarize the third quarter. Our third quarter revenue will be in the range of $785 million-$795 million, which surpassed our quarterly guidance and represents approximately a 26% increase year-over-year. This was the sixth straight quarter of double-digit, 20%+ growth, which demonstrates the success of our Super Micro 3.0 efforts to scale our people, process, and operations to support strong customer demand. On a year-over-year base, we grew in almost all market verticals, including growth of 102% in accelerated AI machine learning 244% in enterprise, 58% in internet data center and cloud, 9% in IoT and embedded, 14% in channel, and 15% in storage. In a traditionally soft quarter, we were able to succeed despite a shortage of both minor and key components.
The results could have been stronger if not for the component shortage and supply chain uncertainty. Our system revenue reached 80% of total sales, demonstrating our customer confidence in our integrated products and total solutions. The total number of nodes shipped last quarter was up by 13% compared to last year. We shipped over 1.2 million product units, including subsystems and computer systems in 2017 calendar year. We were also recognized as the third largest provider of server in the world by IDC at the end of calendar 2017. ASPs on nodes grew 28% over last year due to increased demand for fully integrated systems with Super Micro qualified and validated components. Most notably, the SuperBlade and the multi-node Twin family were in high demand and contributed to higher ASPs. The Twin family was 30% of total revenue and was up 72% year-over-year.
The SuperBlade was up 470% compared to last year. Other higher ASP products including rack solutions, which was up more than 300%, and Ultra System that grew about 10%. Green Computing has always been a priority at Super Micro, and we have introduced our new resource savings architecture to further improve data center cost efficiency and environmental friendliness. The system architectures can achieve up to 60% hardware acquisition cost savings by reducing system enclosure, cables, power supply, networking, processor modules, storage module, and cooling fans. Furthermore, resource saving systems are capable of achieving 1.05 PUE in data centers to save millions of dollars in energy costs, while significantly reduce e-waste. More resource saving advantage can be realized in a scaled data center environment, leveraging Supermicro Rack Scale Design, RSD, to manage racks of disaggregate server, throughout composable storage, and networking with industry standard graphics, RESTful APIs.
We have already had large scale deployments and the design win with our strong resource saving product portfolio, including the disaggregate SuperBlade and BigTwin and other products in our enterprise and large data center customer base. The resource savings technology drives dramatically improve efficiency, increase utilization, reduce initial acquisition costs, and TCO. Most importantly, it can help our mother Earth because it reduce pollution and energy consumption. On the new technologies, Super Micro continues to bring numerous breakthrough innovations to the market. For storage, we have introduced a new highly configurable 1U All Flash storage platform supporting the latest storage media, such as Intel Ruler and the Samsung NF1 NVMe, that deliver up to 300% increase in storage density with significantly higher performance and bandwidth at a scale.
For AI and machine learning, we have introduced the broadest selection of GPU server platforms supporting NVIDIA Tesla V100 GPUs in both PCIe and SXM form factors. The 4U GPU system, in particular, can support up to 8 GPU from a single root with the update NVLink, offering optimal performance in a hyperscale environment for application in self-driving car, smart city, healthcare, scientific research, big data analytics, and more. On the networking side, we are the first to introduce a wide range of 25G NIC solutions that deliver 100% better performance per dollar. Backwards compatibility, plus a future-proof upgrade path to 100G. Super Micro also recently announced new additions to its extensive IoT network edge and security appliance portfolio, featuring systems based on the new SoC, System on a Chip, Intel Xeon D-2100 processor.
With high-res features available in ultra-dense, lower power device, Super Micro's X11 IoT platform deliver balanced compute, storage, and networking for the intelligent edge and the emerging scale-- emerging cost of new 5G-enabled service. Lastly, to support increasing demands, we expand our Silicon Valley operation to over 2 million sq ft with the grand opening of Building 22 at our Green Computing Park. The expansion allow for additional capacity for system integration and a dedicated rack integration facility, powered by one of the Silicon Valley's first clean fuel cell energy. At 3 MW, the facility features automatic rack burn-in with autonomous guide robots in operation. Currently, 60 racks can be burn-in simultaneously, with capacity of delivering more than 600 complete racks per month.
In summary, Supermicro continues to execute on its Supermicro 3.0 strategy and drive a market share gain in total solution and direct end user engagement with large enterprise and data center customers. Our sixth consecutive quarter of double-digit growth despite global component shortage reflects our advantage of first-to-market technology and products, which will continue to accelerate customer demand for Supermicro. Let me hand it over to Kevin Bauer for more financial details.
Thank you, Charles, and good afternoon, listeners. In addition to the growth rate Charles highlighted on a year-over-year basis, I'd like to provide a longer-term view of our performance. Our success as the third largest supplier in a growing market is evidenced by our performance in the following areas by comparing with the last 12 months to the preceding 12 months. In other words, last 12 months as of March 2018 revenue compared to last 12 months as of March 2017. In the area of accelerated AI and machine learning, our last 12 months performance was 148% over the previous 12-month period. In enterprise, our last 12-month performance was 162% over the previous 12-month period. In IoT and embedded, our last 12-month performance was 19% over the previous 12-month period. In storage, our last 12-month performance was 28% over the previous 12-month period.
Returning to the quarter and sequential comparisons. This quarter, we saw our strongest regional growth in EMEA, that was up 63%, offsetting slow performance in China due to the Lunar New Year holidays. The U.S. remained our biggest market, with approximately 46% of revenues. Our estimated range of GAAP gross margin is from 13%-13.2% and includes stock-based comp of $0.4 million and this quarter, accelerated building depreciation expense of $2.6 million that's related to a partial demolition of a building in our new Green Computing Park. Without these two items, our estimated range of non-GAAP gross margin is from 13.3%-13.5%. Despite continued component pricing pressure, our gross margin remains stable. I'd like to make a few comments in specific areas of progress made over the last quarter. In financing, we recently closed an expanded new credit facility for an amount of up to $250 million.
That increased our domestic borrowing capacity by 60%. In addition, this new facility provides a conversion opportunity to expand borrowing capacity to $400 million after certain conditions have been met. With this new source of capital, we increased our network of relationship banks and are able to invest in additional working capital to continue to execute on our long-term growth strategy. At the same time, we have exercised our organization to improve on all three facets of the cash conversion cycle by focusing on customer collections and being more precise about payments to suppliers and the scheduling of incoming inventory materials. That will partially offset the interest related to the loan rate increase during phase one of the loan facility. In our sales organization, we're pleased with Don Clegg's leadership of the sales team.
He has summoned the team's bench strength to step up to new challenges. He has further upgraded the team to bring enhanced professionalism and stronger strategic selling capability to bear in our efforts to win and serve our target customers. Don is emphasizing a stronger team approach utilizing the company's technical experts to improve customers' experience. The sales team is retooled and ready to compete and will help us fully achieve Supermicro 3.0 objectives. The SEC filings process. As we stated in our press release, and as Perry articulated during the introduction, we continue to expand great effort to complete our financial statements and work with our independent auditor to complete the fiscal year 2017 audit process, and ultimately file our delinquent reports with the SEC. As previously indicated, we'll now have a Q&A session where sell-side analysts will be permitted to ask questions.
I'd like to remind you that your questions should be directed to the business update that we just provided, and we will not answer any further 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. To ask a question, firmly press the star key followed by the digit 1 on your touch tone telephone. We will take your questions in the order that you signal, and if you have found that 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 that you 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. Again, that is star one if you'd like to ask a question.
Our first question today will come from Mehdi Hosseini with Susquehanna Financial Group.
Thanks. This is David Rijik for Mehdi Hosseini. Charles, regarding the enterprise, seem pretty strong, 244% growth. Can you offer any more metrics around maybe customer growth, whether that is solely in North America or globally? Just any other insights would be helpful. I have a follow-up.
Yeah. In enterprise, we continue to grow very strongly, primarily start from USA, because of our on-site service and management software already now. We also start to extend to Asia and Europe. It's kind of global available now, and we anticipate a strong growth to continue.
Great. Thanks. Just on gross margins, would you be able to comment on component conditions? I guess, your estimate for gross margins suggests maybe flattish. You see revenue tick down seasonally, but year-over-year, you grew revenue very strong, and you noted that China was a little weak in the quarter. Just wondering what hampered your gross margins from expanding more, given the volume?
As you may know, I mean, DRAM and SSD price is getting stabilized. Especially SSD price is slightly dropping now. This will help our looking for growth gross margin as it be. Plus our economical scale continue to grow. That will help too.
I think one other little unique item for the quarter is that we took a little bit more in E&O provision as well.
Okay. What % of systems were new processors in the March quarter? I think you've provided that in the past.
How many % did they change to?
Yeah. We're talking about Skylake.
Yeah.
It looks as if, as a percentage of revenue for Skylake, this quarter was roughly about 18%.
Mm-hmm. Okay.
The new platform are steadily growing, yeah.
Okay. I think it was 12% a few quarters ago. Any reason why it's not accelerating further, or you guys just think that the tail is going to be longer, or when do we reach that 30%, 40%, 50%?
I guess still maybe two quarter away. Talking about 40%.
Okay. Thank you. I'll get back in the queue. Thank you so much.
Okay. Thank you.
Thank you. Again, ladies and gentlemen, it is star one to ask a question. Our next question will come from Aaron Rakers with Wells Fargo.
Yeah. Thank you. Can you hear me okay?
Yes.
Yeah, Aaron.
Okay. Yeah, sorry, I'm at an airport. I want to go back to the component side of the equation. As you look out over the next couple of quarters, you mentioned that SSD pricing is starting to come down. I think your word was slightly. How are you seeing component pricing and availability play out, not just out over the next quarter or so, but looking into the second half of the year, as there's been some questions around whether or not, particularly NAND flash and even DRAM would tighten back up into the second half?
Yeah. As you may know. I mean DRAM continue to have a certain shortage. Much better condition than before. While SSD kind of pricing is slightly dropping now, that means the supply is more than enough. However, we did see a global other components shortage, including PCB material and all other small components like MLCC. It was surprising, but looks like those small components shortage may continue for many quarters to go.
Okay. Perfect. Can you quantify how much of an impact that has had on your ability to generate revenue? How much more revenue would you have generated if it weren't for some of the component shortages?
I would have to say that small components global shortage have impact our revenue last quarter. I mean, even March quarter. Looking forward, we continue to enhance our relationship and are able to create a better relationship and better safety inventory. Hopefully the impact won't be too big.
Okay. A couple other quick questions, if I can. It looks like your cash balance continues to come down here a little bit. You're definitely doing some things on the debt side. I'm curious of how we should think about, it looks like utilizing your revolver, with still having about $140 million in cash. How am I thinking about, I guess, why use the revolver? How do I think about the capital management side for the company?
Yeah. Under the new revolver, as I mentioned, we upon getting funding, we actually drew down less than what our existing balances were. What I was trying to signal to you as we go forward is that our cash balances will probably be smaller than they had been historically, and we're going to be borrowing just in time, to a greater extent so that we can mute the interest cost impact of the rate while we're in this period of where the rate is more expensive.
Okay. Go ahead.
Yeah. At the same time, our business have been very stable, stably growing, I personally do not feel cash flow will be a pressure. With the new loan system and system set here, the cash flow should not be an issue in the future.
Okay. Perfect. It looks like your cash balance was more or less flat sequentially, I apologize for that misstatement.
That's all right.
The real final thing for me would be, just remind us again as you build out, it sounded like 2 million sq ft of manufacturing capacity, how we should think about the company's current capacity situation relative to your systems business. Just remind us again your total capacity in terms of what you can produce on a systems level.
Yeah. As you know, we have been a faster-growing company from a subsystem to computer system to complete solution and now complete rack, HCI, and kind of complete data center solution. We have been growing very aggressively, and that's why economical scale has been always a challenge. Good thing is in all area I just mentioned, including total solution and rack scale, now our economical scale have been much better than before. Situation can be only better. That's why those capacity we prepare will be a big help for our future growth.
Aaron, as you know, prior to this additional building, which we talked about today on the call, we had a capacity in the neighborhood of $3.5 billion. That fit nicely with the run rate that we're on. With the additional capacity, we're above that now. We're more in the range of $4 billion-$5 billion.
Very helpful. Thank you.
Thank you. Again, ladies and gentlemen, that is star one to ask a question, we'll pause for just a moment. We'll take a follow-up from Mehdi Hosseini.
Hi. Thanks. This is David again. For storage, would you be able to provide a little insight into next gen versus legacy, what the growth rates were?
Yeah. Are you talking about period-over-period?
Year-over-year.
Year-over-year. As it relates to year-over-year in terms of IDC and non-IDC. I think quarter-over-quarter, year-over-year. Non-IDC, I think Enterprise, Charles highlighted, was 244%, and Enterprise was about 54%.
Sorry, I was referring to the storage business, just within storage, there's legacy and then there's next-gen.
I'm sorry.
Storage, I guess overall is about 15%. Right?
I'm sorry. Traditional up about 29% and next gen about two.
Mm-hmm. Okay. Are you seeing anything in the market for next gen, for the slower growth, hyper-converged, all flash, anything that would account for some of the softness?
I guess in overall, talking about next few quarter or next few years, we will continue to have a strong growth on both sides, traditional storage and next gen. Last quarter, specifically 2% only for next gen, I guess is just a coincidence.
Overall, we continue a strong growth for both traditional and next gen.
Okay. Just one for Kevin, just if you can provide an update on your cash cycle efforts, any measures that you've taken already, and when we can expect improvements to the cash conversion cycle.
Yeah. Naturally, that's going to take some period of time. As I mentioned earlier, we worked on the collection side, being more specific with customers in terms of expecting payments on time, and being a little bit tighter in terms of not shipping until we saw customers become current. Just basic blocking and tackling. On the payment side, we worked to tighten up when we pay customers. Then as I said earlier, we're being more precise about when we bring in inventory. To the extent where maybe we brought in stock for the whole month in the beginning of the month, I'm exercising the organization to be a little bit more just in time as it relates to when we bring in inventory. That's going to take some time to bear fruit, stay tuned.
Yeah. As you know, we are quickly grow in enterprise usually buy total solution. That's why the cash cycle time a little bit longer. However, we continue to work with our customer for a kind of a better payment term, we got a very good support from some enterprise customers, basically.
We've had some suppliers help us out too with terms being a little bit longer.
Yeah. Overall cash flow should be safe.
Great. Thanks so much. Appreciate it.
Thank you. Our next question will come from Michael Staiger with Odeon Capital Group.
Hey, good afternoon. Thanks for taking my question. Hey, are you guys seeing an increase in RFPs for designs that incorporate GPUs or Arm-based servers? If so, where would you expect those segments to break out in the future on a % revenue basis? Would they be accretive to your current programs, or would they be a replacement or a substitution of the traditional builds that you're doing? What would the gross margins profile look like on those as well? Thanks.
Big question.
Sorry.
When it comes to GPU, that's included in our high-performance computing, or in AI. We just shared that year-over-year, that grew 102%. That's within our current tracking. You'd want to keep your eye on that.
Are ARM-based servers part of your build cycle right now, or?
We do not have ARM-based.
That's a no.
No. No Arm-based.
No Arm-based. Yeah.
All right. Great. Thanks.
Thank you. Our next question will come from Nehal Chokshi with Maxim. Your line is open. Please go ahead.
Nehal?
Your line is open.
You on the line?
Yeah. Sorry. I've been skipping between calls, so this may have been asked before, with your congratulations on the debt raise, I'm wondering what kind of, number 1, were there other banks that actually participated in the debt raise, or do they just simply indicate interest and Bank of America is responsible for all the debt that increased that capacity that you have right now?
No, I'm going to answer that question. The syndicate that we had actually was, as we pointed out, was broad. We increased our relationship with a number of new banks who joined. In addition to that, I will also tell you that the commitments were oversubscribed, and we had to cut back. It worked out very well for us, not only in an increased facility size, but also new banking relationships for the company.
Okay, great. What kind of due diligence were they able to do? Did they have full access to the investigation that was done? The follow-up question is, I just want clarity on what does this testing mean? I'm not too sure what that means.
I'll answer the first half of that and I'll let Kevin answer the second half of that question. With regard to the bank group, as is typical, they are under NDA type of arrangements with us.
We could provide a bit more information to them, than we could to investors who are not under an NDA. Yes, a little bit more information was provided.
I think in addition to that, we held weekly meetings with them where we showed our cash flows, and they saw how we, as a new team, managed cash, and were impressed by that. I think they gained comfort over the fact that our cash flow continued to be strong and came to their conclusion. As it relates to the additional testing, I'll remind you that we're not going to be answering questions about that. It's just the continuation of the process to get our arms around all of the issues that occurred during that timeframe. As we said, we think we're nearing completion there, and we're working in parallel with other teams to be able to get our filings done as expeditiously as possible, and we'll leave it at that.
Thank you very much.
Thank you. Our next question will come from Jon Lopez with Vertical Group. Jon, your line is open. Please go ahead.
Hi, I apologize. Thank you. I have a couple quick ones if you guys don't mind. The first one, the internet data center vertical looks like it was pretty healthy. I know the scale has just gone a little bit all over the place, but it looks like it was up comfortably double-digits sequentially and up, as you guys said, 58 or 6% year-on-year. Can you just talk a bit about what's driving that? In particular, are you seeing any resurgence in what used to be a reasonably large customer for you after they took a break for a while there?
Very good question. Our old customer continue to adopt our product. We also continue to win more new customer. The key reason, I believe, because our Green Computing followed by resource saving. The Green Computing and resource saving solution is not just save customers energy cost, initial hardware acquisition cost, but also make their deployment easier and also help our mother Earth for less pollution. All are positive factors. We believe we will continue to grow strongly in those areas.
Thanks for that. Sorry to rephrase what you said, but it sounds like that's a reasonably diversified kind of resurgence in that segment. Is that a fair way to characterize it?
Again, most are our multiple node, Twin and TwinPro and BigTwin product line, including our MicroBlade and SuperBlade, because lower cost and better performance, energy saving. Lots of advantages. That's why the market continue to like our solution, and more and more new customer that will engage with us.
Got you. Very helpful.
Continued growth resurgence as you described, the customer coming back. We've had a sprinkling of new customers, too.
Got you. Thank you. That's really helpful.
Indeed, there's a major impact, negative impact in last few quarter is the shortage, memory shortage, SSD shortage, followed by a small component shortage. We have been suffering a lot before, in last, I would say, four quarter for shortage issue. This year, situation is getting better.
That actually ends up nicely to my second question, which is, I know you guys aren't going to give us explicit guidance, but just conceptually, given that we are seeing a little bit of leveling off and some easing in memory, which is reasonably large for you as a bill of materials, and I understand some of the problems in other places like capacitors and things like that, but those, I think, are reasonably small, certainly relative to memory. I guess the thrust of my question is, as the year progresses, is it reasonable for us to see the gross margin lift from this kind of flattish range you've been in for the last three, four quarters? Or are the headwinds in those other buckets enough to prevent that?
In terms of shortage and component pricing, I believe, looking forward, next few quarters will be in a positive sign. Kevin, maybe something to add.
Yeah, I think it will be positive, but modestly. I expect that we'll be operating in this gross margin range for now, not anything appreciably large. Certainly now that I've been on the job for roughly about 90 days, and after we get job one done in terms of getting our SEC filings done, we'll be able to devote more attention to developing programs internally to improve gross margin over time. Over time, we'll look forward to sharing progress with you in that regard.
Got it. Thanks. Two more real quick ones. I apologize. If I look at the OpEx, and it's kind of implied in where things are shaking out, it looks like OpEx has been pretty flattish, non-GAAP at about 68, 69, in that ballpark for the last couple of quarters. Excuse me. Is that an area you would expect to hold in this same range, or do you think as some of the facility spending and whatnot layers in that we would expect OpEx to maybe pick up a little bit?
Well, facility spending is mostly going to be within the manufacturing arena. It will be hitting gross profit as we turn it on. It will be at a modest pace. In terms of OpEx, we're continuing to invest and hire to scale. It will have some modest updrift as we go forward.
Okay, got you. The very last one, just coming back to the cash real quick. I just want to make sure I understand the dynamics. Your gross cash was noted. It was up, like, $1 million, but you drew an incremental $9 million off the facilities, roughly. My question is, was that timing related to any extent, as you are getting rid of the old facility and bringing the new facility on, or if not, what drove that draw in the revolver?
It was just needed for working capital and specifically to buy inventories. Recognize that we closed the new facility in April, which is after March, so there is no history there. That is why I wanted to preview for you that, as compared to our current cash balances, don't be surprised in June that our cash balances are going to come down because of the fact that we are going to be much more prudent in terms of borrowing and managing closer.
I got you. Understood. It should see [the bulb light on] and smooth down, in other words, in June.
Yeah.
Okay. Really helpful. Thanks very much.
You bet.
Thank you. It appears at this time we have no further questions. I'd like to turn the conference back over to Mr. Liang for any additional or closing comments.
Thank you for joining us today. We're looking forward to finish fiscal year 2018 on a strong note. Thank you, everyone. Have a great day.
Thank you. Again, ladies and gentlemen, that does conclude the Super Micro third quarter fiscal 2018 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.