Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer Incorporated second quarter fiscal 2018 business update conference call. The company's news release, issued earlier today, is 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, January 30th, 2018. A replay of the call will be accessible until midnight, Tuesday, February 13th, 2018, by dialing 1-844-512-2921 and entering replay pin 5210439. 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 Super Micro's business update conference call for the second quarter fiscal 2018, which ended December 31st, 2017. As announced in our press release, the company has completed the previously disclosed investigation conducted by the audit committee. Additional time is required to analyze the impact, if any, of the results of the investigation on the company's historical financial statements, as well as to conduct 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. The company is unable at this time to provide a date as to when the Form 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 adjustment.
The company intends to file its quarterly reports on Form 10-Q for the quarters ended September 30 and December 31st, 2017, promptly after filing the Form 10-K. Based on these delays, during today's conference call, Super Micro will address business and market trends from the second fiscal quarter of 2018 and will discuss estimated financial results. 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, or our most recent Form 10-K and our other SEC filings. All of those documents are available from the investor relations page of Supermicro'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 second quarter. Our second quarter revenue will be in the range of $840 million-$850 million, surpassing our quarterly guidance and exceed our long-term guidance of reaching the $3 billion runway by December 17. The long-term investment to grow our large enterprise customer base, along with our investment in global operational infrastructure, data center management software, and global services, continued to increase in revenue and non-GAAP profitability. We were also able to improve our non-GAAP operating margin and EPS by increasing oversight and control of our operational spending growth. In this seasonally strong quarter, we achieved over 30% revenue growth year-over-year, and we saw robust shipments throughout the quarter. We grew in all market verticals, including x86, AI, machine learning, storage, IoT, embedded, internet data center, cloud, and particularly strong growth with large enterprise customers.
Our complete system business reached more than 175,000 nodes, which resulted in an increase of our system business to approximately 77% of total revenue. We also grew in every geography, with the biggest growth again being in Asia Pacific and in China specifically. Our performance this quarter demonstrated that our aggressive execution on Supermicro 3.0 is a great strategy to grow our business. We saw accelerated growth in design wins and revenue with large enterprise customers. Expansion in large volume sales to internet data center, and growth in our traditional channel business as well. We are also seeing a strong ramp of our new system based on Intel Scalable Processor family. The Skylake product line grew more than 100% quarter-over-quarter. With the new X11 Skylake systems, we introduce market-leading innovation.
The BigTwin system, featuring four dual processor nodes in 2U, is truly a product unmatched in the industry. It is the industry's only no-compromise multiple node solution that delivers the best-in-class high components and efficiency, while also supporting full performance 205 W CPU, 24 DIMMs for maximum memory, all flash NVMe, low latency, and expanded I/O flexibility. We are seeing strong growth across multiple markets with the product, and we just further enhanced the product with a 3U PI design, delivering an extra 30% performance gain in certain applications. NVMe flash storage continues to play a major role in our success. With our open traditional storage platform growing 47% year-over-year. Supermicro's new all flash NVMe 1U JBOF, just a bunch of flash, and 1U SuperServer, with support for 32 U.2 NVMe or Intel Ruler NVMe, or 36 Samsung NGSFF NVMe.
More than triple the all-flash storage capacity of previous 1U solutions, will provide petabyte scale storage in a single 1U system. We also released new all-flash NVMe system designed for high-performance storage, delivering up to 18 million IOPS with latency under 10 microseconds. For our rapidly growing large enterprise customer base, we announced the certification of SAP HANA on Supermicro 2U four-socket SuperServer with up to six terabytes of memory and all-flash NVMe or SSD. Leveraging high memory processing speed and multiple core processor technology, our SAP HANA solution is capable of running advanced analytics alongside high-speed transaction and get accurate real-time results. We were honored to partner with NASA to help expand their research capability to meet NASA's Center for Climate Simulation needs for expanded advanced computing and data analytics, used to study the Earth, solar system, and universe.
We deployed a 20-rack scale solution fully built and integrated at our Silicon Valley headquarters. The Supermicro factor-based solution helps expand NASA's research capability with a combination of high-speed system performance and optimized cost, bringing an additional 1.5 petaFLOPS to NASA's research. 11 years ago, we introduced the concept of green computing, with power optimized and energy efficient systems. This quarter, we were pleased to take green computing to the next level with the industry's first Resource Saving Architecture that expanded green computing beyond just power savings to the overall conservation of data center resources. The Resource Saving Architecture contributes to a greener data center and deliver double-digit savings in operating costs and up to 40% savings in hardware system acquisition cost. It reduces resource consumption, reusing versus replacing, and refreshing to more optimal performance quicker.
The architecture is built on key Supermicro innovations, including our disaggregated MicroBlade design, the resource pooling of our latest C4 and storage server products, free air cooling, and our open industry standard Rack Scale Design management software. We also expanded our Silicon Valley manufacturing headquarters with a new rack integration facility to support the increased capacity of rack scale deployments. The facility features one of the world's largest clean energy, fully autonomous rack scale integration and manufacturing site. In summary, Supermicro's momentum of strong growth increased in our second fiscal quarter of 2018, we exceed our target for $3 billion annual run rate based on our customer wins and from pipeline of business. We expect to continue this growth in the upcoming quarters. Moving forward, we will remain highly focused on executing our Supermicro 3.0 strategy and increasing the large enterprise customer base.
Let me take this time to introduce Kevin Bauer, our new CFO. Kevin joined Supermicro over a year ago as the Senior Vice President of Corporate Development and Strategy. Kevin has over two decades of experience in financial leadership, including multiple CFO roles for high tech companies here in Silicon Valley. I'm looking forward to Kevin's contribution in the success of Supermicro 3.0. Let me hand it over to Kevin for some brief comments. Kevin?
Thank you, Charles, and good afternoon, listeners. For those of you who may be new to Super Micro, I have just succeeded Howard Hideshima as CFO. Let me take a few minutes to summarize my background, which was provided in a press release earlier today. Prior to joining Super Micro, I was the Senior Vice President and Chief Financial Officer of Pericom Semiconductor Corporation from February 2014 until its sale to Diodes in November 2015. Thereafter, assisted Diodes with the integration of Pericom until November 2016. Prior to that, I was Chief Financial Officer of Exar Corporation from June 2009 through December 2012 and Corporate Controller from August 2004 to June 2009. Between these roles, I gained additional experience by assisting a CFO colleague in his effort to bring a company current in its SEC filings.
Since January 2017, I have been at Super Micro in the role of SVP Corporate Development and Strategy. During this period, I have focused on financial planning and analysis to further strengthen our forecast capability. I now have a number of experienced financial planning and accounting professionals that have joined my team. I believe this broadly experienced talent will bring additional value when combined with the existing dedicated accounting staff with deep Super Micro experience. We announced our preliminary financial information today in today's press release, which you can refer to. Looking forward, the company expects net sales in the range of $700 million-$780 million for the third quarter of FY 2018, ending March 31st, 2018. While we work to complete our number one priority of compliance with our SEC filings, we will not be making any comments on the preliminary financial results.
Again, I'm excited to work with Charles just as Super Micro is ramping, and I look forward to engaging with our investor community and sharing more about our progress after we have met our SEC filing requirements. Let me now turn the call back to Charles and Perry for Q&A.
Thank you. As indicated previously, we will have a Q&A session now, in 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 have just provided. We will not answer any 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. If you'd like to ask a question today, please do so by pressing the star key, followed by the digit one on your touch tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one on your touch tone telephone to ask a question. We will first go to Aaron Rakers from Wells Fargo.
Great. Thanks. This is Joe Quatrochi on for Aaron. A few questions, if I could. First, I think last quarter you gave us some details related to some of the segments growth, like high performance computing, enterprise storage, stuff like that. Is there anything you could give us this quarter to help us out?
Hi, Joe. Certainly, we can do that. Again, these are preliminary numbers, so these are our best estimates at this time. Storage was about 22% of our total revenues. That is up about 22% year-over-year. Our internet data center, cloud vertical was over 11%. Let me go on here. Accelerated computing, again, over 10% this quarter. The amazing thing about the accelerated computing is that it grew about 134% year-over-year. That's continuing to show a lot of momentum.
IoT and embedded was approximately 9%. That was up also about 23% year-over-year. Enterprise was approximately 7%. Continues to show very strong growth based on this huge revenue base that we have for this quarter. Last but not least is channel. That's about approximately 42% or so. There is a little bit of overlap, as you know from prior times we've spoken, that some of our business is captured in channel and where they do some things for us for some of our customers. Is that helpful?
Yeah, that's very helpful. Thank you. Maybe just a follow-up to that. When we look at your performance this quarter relative to the guidance that was laid out, how do we think about what was the underlying driver for the upside? Was it broad-based, or is there any particular market or partner you could point to?
Overall, our growth will be continued to be very strong, other than there are some component shortages around the world. We believe growth will be continued pretty strong.
Yeah. Just to add there that, as we said in Charles' remarks earlier, that it was very broad-based. Every single vertical was up, and we were up in every geography.
Okay, that's helpful. Maybe just one more, and I'll cede the floor. The management resignations that you outlined in the press release, especially related to the sales leadership, how do we think about those relative to the audit that was just completed? Are those related? Are they separate? How do we think about your ability to forecast revenue going forward?
Joe Quatrochi, as you know, we said that we wouldn't comment on the audit committee investigation and the delayed financing case. Definitely, we're not at liberty to discuss anything related to the audit committee. I'm going to have to decline your question on that. We did announce a new person to head up our sales, our worldwide sales. His name is Don Clegg. That was in the press release from earlier today. He's a great guy. He's been in the company for many, many years, and he's often stepped into that role when people were absent and traveling. He has a wealth of knowledge about the company and how it operates. With regard to forecasting future, Kevin Bauer, would you like to make a couple of comments?
Yeah, I think first I'd say that, like most companies of our size, we have a bottoms-up process for forecasting, and there are many players that are very savvy and very skilled in terms of doing the forecasting. That is one of the areas that I've been working on as well to really focus in terms of our estimates for our top customers. I think we have the wherewithal and the bench strength to be able to do that well in this time of transition.
Yeah. Plus, in the last three to four years, we have been well prepared for Supermicro 3.0. We did hire and train, and also internal sales expertise. Our team is becoming much stronger than before even.
Okay, thank you.
Our next question will come from Mark Kelleher from D.A. Davidson.
Great. Thanks for taking the questions. Congratulations on very strong revenue results. I kind of expected a little more to drop through to the bottom line. Could you talk a little bit about gross margin, your expectations there? I know we kind of dipped again. Memory pricing, maybe work that in, then talk about the operating lines, if you can, in terms of, is there increased spending? I know you said you are building out the finance team a bit. Is there more G&A? Where can we expect some puts and takes on the operating expenses? Thanks.
Basically, our revenue has been growing very strong, in next couple of quarter, we will continue that stronger trend. The Memory price still going higher, unfortunately. The net margin, gross margin have been about flat, I guess. Other than that, the business has been very strong, we foresee a very strong growth in next few quarter, at least.
I'll just add to that. It sounds a little bit like last quarter. We had geographic mix with very strong China revenue. We continue to have product mix where a lot of our products have more component reliance to them, so that impacts that. We're still in the Grantley lifecycle technology. As Charles mentioned in his comments, our Skylake grew 100%, but it was off a low base. The big part of the ramp on Skylake is still ahead of us. We've said that now for the last several months, that beginning 2018, we'll start to see that go higher. Lastly, based on the report of our estimated EPS, you can probably tell from that that we did make some significant progress in terms of our EBIT margin. That was up significantly as we were able to control OpEx.
Great. Just one last one. With the changes in the law, what tax rate should we be assuming?
I think, as we go forward, our tax rate is probably going to be in the mid-20s or so.
Okay, great. Thanks.
Our next question comes from Mehdi Hosseini from Susquehanna Group.
Hi. Thanks for taking the question. This is David Ryzhik for Mehdi. Just wanted to get a sense of deadlines that we're working with. I think in January you filed an 8-K regarding a bank extension, suggesting that you have to file by March. Just wanted to sync up on that to see if March is really a deadline that you're working with for the 10-K.
David, we are working as hard as we can in conjunction with our independent auditors to try and complete this process as soon as possible. As we've already described, at this time, we're not able to really determine the date when that will happen. We do have a NASDAQ extension until March 13th and our bank lines with Bank of America, we have an agreement, which we've previously announced, that syncs up with that March date.
Got it. Is that a hard deadline, that March date with Bank of America, or do you anticipate flexibility around that if you need a little more time?
David, we're not going to comment about our discussions with Bank of America at this time.
Okay. Fair. We came across some orders from TSMC to Super Micro through some public filings. Just wanted to get a sense of what they're for. I think there was a $40 million order to Super Micro in the December quarter and maybe we saw follow-on orders. Just wanted to get the sense of what those orders are for. Is that internet data center business or not, and how sustainable is that demand from that customer?
Thank you for the question. Basically, we don't comment for specific customers or business condition. However, I'm happy to share our BigTwin with lots of large enterprise account have been continue going very strong. We do feel very positive. We will continue to grow in this segment. Indeed, many enterprise customer have been growing business with us.
Great. Thank you. You touched on the component environment. Would just love to get a sense on how you see DRAM and NAND today relative to your business, and how you anticipate it impacting your March quarter.
Yeah. DRAM price continue to grow generally, and other components, even [audio distortion], we do see some shortage global wide, especially our growth has been much faster than the average in the whole industry. We do see a shortage challenge. With getting stronger relationship with our vendor, there are some challenges, but I believe we will be okay.
Just wanted to get a sense of all the public discussion around the Meltdown and Spectre vulnerabilities. How do you foresee that to impact the Skylake cycle? Do you actually believe that could actually drive some incremental refresh activity?
Yes. Good question. Our Skylake indeed grow more than double over last quarter, and we do see a strong growth this quarter and next coming few quarter. Overall, Skylake will grow strong while the last generation go well. Demand is still strong. Especially we have lots of embedded IoT customers. Overall, our growth will be pretty smooth, I believe.
Great. Just last one from me, if you can talk about storage. I think you gave a total storage was 22% of total revenue, but any sense on next gen storage?
Next gen storage continue to grow year-over-year stably. Some quarter grow more, some quarter grow less. Overall, next generation storage will continue to grow strongly.
Great. Thank you so much.
Thank you.
As a reminder, that is star one on your touch-tone telephone to ask a question. We'll now go to Nehal Chokshi from Maxim Group.
Yeah. Thank you. Congratulations on the strong results and at least dropping some of that, well, rather seeing the $10 million OpEx year-over-year increase result in an operating profit increase on a year-over-year basis. That's good to see. The guidance for the March quarter, while relatively broad range at the midpoint, implies we'll be down 12% Q-over-Q, versus an average I think is usually down the mid-single digits. Why the greater level of seasonal decline that you guys are projecting?
We believe the growth will be strong March quarter, even though this is a seasonally slow quarter. Because of that shortage, component shortage global-wide, we try to be more conservative. That's why we offer a bigger range, $700 million-$780 million.
Okay.
Also, Nehal, let me just add as well, as you know for the industry historically, there's a lot of seasonality in this March quarter, right? With the Lunar New Year and some of those other events that are happening. It's a little bit harder to gauge with that, plus the comments that Charles made.
Okay. What was the reason for the resignations of the sales leadership?
Nehal, I appreciate your question. I don't know whether you were listening earlier. We're not at liberty to discuss the audit committee investigation.
Just point out by saying that you're not at liberty to say that, then the assumption will be that those resignations are indeed related to the audit in some way or another. Hopefully, you can give a little bit more color as far as what's the driver here.
Again, Nehal, your conclusion is your own. That is nothing that we have said or discussed in any of our press releases. We are not going to discuss the audit committee investigation.
Okay, understood. I do have one more question, which is audit-related. I think it's a clarification, hopefully you can answer it. Just to be clear, what was disclosed about the audit committee's investigation was that it was purely on the revenue recognition timing. Is that correct? Do I recall that correctly?
That is what we have said in previous press releases.
Okay, great. Thank you.
That is all the time we have for questions today. I'll turn the conference back over to our presenters for any additional or closing remarks.
Thank you for joining us today, and we look forward to a strong 2018. Thank you everyone. Have a great day.
This concludes today's presentation. Thank you for your participation.