Good day ladies and gentlemen and thank you for standing by. Welcome to the Super Micro Computer Incorporated First 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, security and 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, October 26, 2017. A replay of this call will be accessible until midnight, Thursday, November 9, 2017, by dialing 1-eight 40four-five twelve-two 1921, and entering replay PIN 93 30,570. International callers should dial 1-four twelve-three seventeen-six 1671. With us today are Charles Ling, Chairman and Chief Executive Officer and Perry Hayes, Senior Vice President, 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 1st fiscal quarter 2018. Which ended September 30, 2017. As previously disclosed by the company, additional time is needed for the company to compile and analyze certain complete a related audit committee review in order to permit the company's independent registered public accounting firm to complete its audit of the financial statements to be incorporated in the Form 10 K and complete its audit of the company's internal controls over financial reporting as of June 30, 2017. Based on these delays, during today's conference call, Super Micro will address business and market trends from the 1st fiscal quarter of 2018, and we'll discuss estimated financial results but reference to contained in future filings with the SEC. By now, you should have received 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 and the press release we issued earlier this afternoon, our Form 10 K for fiscal 2016 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 questions should be directed to the company's business update covered in today's call. The company will not address any questions regarding 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 first quarter. Last quarter. We had spanned up our already strong growth in revenue, market share and brand name value. Our new quarter results confirm that we have been and continue to be the fastest growing Tier 1 IT inward structural provider capable of delivering first go to market product innovation at a global scale with quality, management and solar air, service and support.
In addition to strong revenue growth, we kicked off several new strategic products in strong Emerging Technology Market. That should deliver significant future growth. Earlier in the quarter, we launched our complete portfolio of new X11 products based on the new interior geome scalable processor or skydex family. This launch was the product of over 2 years of April with about 2000 of engineer. As a result, we were ready at the launch with over 100 product offerings.
The X11 business quickly ramped with new system representing 12% of all processes shipped. The key to the successful rep was the breadth of our portfolio and our time to market advantage with powerful new technology built into the new platform. We will continue to leverage our new product advantage in the coming quarter and ramp continuously. Computer systems accounted for a great portion of our business at approximately 75% of our overall revenue. The growth of computer system is being driven by new technologies, such as the pool of hardware NVMe, higher memory density, accelerated computing, higher TTP GPU support, and higher bandwidth connectivity.
This technology benefits from our in house engineering, design and validation to provide a customer with higher performance, visibility and quality solutions. Moreover, our computer system carry a higher average sales price ASP and strategically increase the opportunity for additional management solar and global service revenue. Delivering superior product and datacenter technology to the market continues to be the cornerstone of our company. And this quarter, we saw a strong performance for our twin multiple systems, storage, especially our old flash NVMe Ultra platform. GPU accelerated computing and great service.
Our new multi point on Bitcoin architecture is one of our fastest growing new product launch ever. The Bitcoin provides both higher density and efficiency than traditional documents, while supporting state or art features, including OFresh NVMe 2014, memory and the highest performance in Tier G on Scalable Processors. Our Ultra NVMe server also perform well with more expandability option, they are optimized for high performance storage, analytics and in memory applications. For example, the 2020 NVMe Ultra platform delivered a record breaking 80,000,000 high ups. The design utilized an unbroken architecture, allowing ATPCI event to the 20 NVMe SSD directly for an compromised Direct Connections to achieve Maximus storage performance.
In storage, which accounted for 20 percent of our overall business, we saw strong customer demand. Our capacity maximizes top loading storage portfolio is anchored by our 90 and 60 phase storage server and safe routes to strengthen our portfolio and increased customer choice and efficiency. We have stopped high volume promotions, high volume production or a brand new Sure tabs 45 based storage server with NVMe capturing option and highest TTP CPU support. We have also launched a new category of 1 new petascale products. Now all fresh NVLE, one new mean, just a bunch of flash.
And when you ship a server, which support for 32 hardware NVMe SSD, providing high performance capacity at petabyte scale, think about that, 1 petabyte in 1U. The new 1U of NVMe storage server and CFO, provide share storage pools. They are definitely becoming the 44 hardware infrastructure. For demanding big data analytic applications, such as autonomous driving and real time financial fraud detection up to 12 hosts can be direct connect to the WANU Pool NVMe storage. Alternatively for customers, 212 DiPree and NVMe, over fabric solutions, hundreds of hosts can be connected to the cloud high performance NVMe storage, over Ethernet, InfiniBand, omni test or PCIe.
As the market shift to more flash based solutions, we see much stronger adoption of NVMe in both hybrid as well as all flash solution, especially for open stack, cloud and hyper converged solutions. Coming this quarter, our new do the NVMe solutions, we have been forced to market with truly NVMe optimized server. That provides higher density bandwidth and improved latency for big data and analytics and drug scale solutions. We are especially excited about our high performance and accelerated computing business, which was approximately 11% of our total revenue for the first quarter, and that grew more than double from last year. We continue to develop our rated computing product line, targeting machine learning, deeper learning applications and AI.
As we indicated last quarter, we are working with number of automotive companies for autonomous driving technology, which require accelerated computing as well as NVMe storage solution to achieve the desired compute IRF and latency combination. Most recently, Super Micro Alliance optimized solution for the new NVIDIA Tesla V100 GPUs. Our 4U system supports up to a V100 GPU. With MVDING design for HPC cars and the hyperscale workload. We also have a single route complex PCIe design.
Let's support up to 10 GPU in 4U, which has shown a dramatically improved GPU peer communication and performance compared with previous generation. For even greater GPU density and scalability, our one new solution, let's put up to 4 V100 GPU per system. Or up to 168 GPU for standard drag. Other than GPU, we have developed a brand new blade solution featuring the new, portable night family accelerator from Intel. Our AU shingle blade cannot be configured with a mix of scalable process, brake and nice blade, optimized for AI training and inference application.
The nice play is just as part of our deeper learning engagement into this exciting market. By partnering with Nadidin accelerated computing and Semiconductor company. We developed next generation deep learning and AI platform. We had invested additional engineering resources this quarter to co design this solution. They will present us with significant market opportunity going forward.
We also launched a new 6 Yixi Wix blade solution, designed to future proof our customers' investment co design with Intel that disaggregate architecture enabled independent upgrade or CPU and memory IO storage as well as the power and cooling. With the lower initial acquisition cost and TCO, the new architecture provide higher return on investment by supporting multiple generation of independent technology TuboBray and BigQuery System, our optimal building product for WAC scale solutions. Along with the Chipomicro RSC Solar, our direct scale total solution in power cloud service provider, telecom and Fortunefinder company to develop their own AGL efficient Solar Air Defined Data Center. The solution delivered up to 54% improvement in cooling power efficiency, preventing vendor lock in this solution ship with open industry standard, ipmi to DAO and British APIs. Designed to lower management overhead in large scale data center and other enterprise.
Before ending, let me circle back with some detail on our business side. From a geography perspective, North America's remain consistent at more than 50% of our business. Asia Pacific, our 2nd strongest geography, extend its recent growth. And we expect that It will be more than 25% of our worldwide business, which China making up the majority. Email was lower a seasonal effect impacted result.
Here are some updates on a few other key market verticals for this quarter. Our IoT and embedded activity continue to represent approximately 10% of our business. Internet datacenter IDC improve due to more project wins. And we expect It will be approximately 10% of our business. The overall enterprise business continued to grow.
Our channel business is in the range of lowtomidof40percent of our business. Due to Michael's momentum of strong growth continuing into our first quarter of 2018. We recently expect to report revenue for the quarter at the top end of our original revenue guidance. Which will be about 29% growth from last year. As I have mentioned earlier, we are initially multiple we had initiated multiple high credential platform codevelope with our strategic partner during this quarter, we have invested our resource to embrace this new opportunity ahead of and we will aggressively execute our strategy.
In summary, we have begun fiscal 2018 on a strong note with our first quarter revenue, continuing the momentum of the faster several quarters. We are fully prepared for the ramp or the technology transition. That is just beginning. With our industry leading product line now shifting we are on track for a $3,000,000,000 run rate in the December quarter. Let me now turn the call over to Perry.
Thank you, Charles. As indicated previously, we will have a Q and A session in which sell side analysts mitted to ask questions. I would like to remind you that your question should be directed to the business update that we have provided. We will not answer any
Thank you. Also, We'll then come back to you for additional questions. We'll now take our first question from Alex Kurtz with KeyBanc Capital Markets.
Yes, thanks guys for taking a couple of questions here. I have to say this is unusual circumstances. So I, I have to say the questions I need to ask are related to the business update. And hopefully, you can touch on them at at some level. What gives you the confidence to provide forward forward guidance into the current quarter, given that the audit committee is reviewing transactions that may still be part of the business
we feel pretty confident that in the revenue number that we've indicated today, that it is within a prudent range. And, even though we can't really provide a total complete baseline yet, but because 2017 isn't finalized, we do feel confident that within this range, that we've indicated at $6.75 to $6.85 that it is an appropriate range. Going forward, are continuing with the momentum of business that we've had in the past, if you look back to starting with last December, And it's based on a great mix of new customers and market verticals that are all growing, as you can see from what we've reported So, we feel pretty confident. In addition, as we've been saying for several quarters as well, we think that we'll end the, calendar quarter at a $3,000,000,000 run rate and, Charles has just reiterated that in his remarks.
Okay. I'm just still a little confused about why you even go out in the limit and provide December guidance but maybe just that's something you just can't talk to right now?
Well, we do think it is important to provide, trends and the growth indicate direction of growth, and it was also indicated in the current quarter number, which we just provided you as well.
But again, that's why I just mentioned, I mean, a 3, 3,000,000,000 dollars, 3,000,000,000 dollars, $3,000,000,000 out of the run rate should be, achievable.
Last question for me. Can you give us any update on your CFO, Howard and his status with the company at this point?
Yeah. Howard is, working very hard on the, issues related to the filing of the 10 K at this moment.
Okay. Thank you.
Thank you. We'll now take our next question from Brian Alker with ROTH Capital Partners.
Hi guys. Again, thanks for taking some questions in some untraditional circumstances here. Just for a clarification point reading through the release today and kind of going back to the delay that we're incurring here on the 10 K. To be clear, what's being evaluated by the audit committee isn't whether or not the revenues were real, but rather not the documentation around which period the revenues were recognized. Is that the case?
Brian, good to talk to you again. As I indicated, we're not going to answer any questions related to the filing of
coming back to the update with the margins that you guys, the range of gross margins that you're providing, it would indicate that we're not seeing any improvement, in the dynamics from the memory side of the equation. Is that still what's pressuring the gross margins at this point or has there been a shift product dynamics?
Yes, I guess, mainly price men grew at LDP this quarter again, But this thing is that we have a good inventory. I mean, I'm good with the vendor. So we believe PG And E is working on the growth mostly.
Okay. And are you continuing to purchase inventory in advance for key customers? Specifically memory inventory?
Kind of mix, but overall memory SSD condition, is in a good condition. I would like to say overall.
Yes, I think you can safely say that what we've been doing over the past several quarters we are continuing to do that. We are continuing to hold inventory going into the quarter. It's still not enough to see us do the whole quarter. As we've talked with investors previously, we are during the quarter at some point, still acquiring inventory to support our customers.
Okay. And then other than the efforts going on surrounding the Review here with the 10 K. Has there been any structural changes that would affect the operating expenses of the company outside of normal business operations?
No. Everything is pretty much saying. We have a great business. We wanted to do this business update because, it is a very strong business. It is growing very strongly.
And we have tremendous opportunities. As Charles mentioned in his remarks, we have great opportunities in new projects with some of the leading semiconductor companies for revolutionary designs in AI. And as a result of that, we've added some engineering headcount in the previous quarter. That is one of the things that impacted operating expense somewhat this quarter, but no, everything is on track. Especially
the new process of Skydex and the NVMe product line, have been already to ship. So we believe La Pigeons will continue to grow strongly.
Okay. And then just one final one. You mentioned IoT and data center, each being roughly about 10% of of the revenues. I'm curious how the storage business was tracking for the company given how fast that's been growing for you guys over the past couple of quarters.
Yes. Storage business was, we called out here that it was greater than 20% of the of the entire business. It continues to grow. In fact, I think you could say this quarter, we actually saw our open storage go a little bit faster based on some of these designs, which Charles called out, especially the top load especially some of the NVMe solutions, they're growing very rapidly. We'll pick a path, AI, HPC And we
have been going very well, including the storage solution for that market.
We'll now take our next from Nehal Chokshi with Maxim Group. Please go ahead. Yes. Thank you for doing the call as well. There will be no presentation or CFO commentary because, obviously, the results have not been audited yet, correct?
That is correct.
Okay.
Charles did run through some of the vertical data, but, Perry, could you just run through that one more time real quickly? I'm sorry.
Yes, sure. We said storage was greater than 20% of our business, accelerated computing, also 11%, well, greater than 11%. IDC was approximately 10%. IoT, again, approximately 10% channel was, sort of mid to low 40 percent of total business and enterprise was approximately mid single digits, call it 5, a little bit more than 5%.
Okay. And the reason why there's more uncertainty around what channel was as a percent of revenue? Is that that's where the uncertainty resides with the when revenue recognition should be getting done? Is that correct interpretation?
Again, Nehal, we're not going to anything related to the 10 K filing.
Okay. All right. And then What's the status of the repurchase program? I believe it was it expired and I think you repurchased close to $20,000,000 at one point in time. Would you guys consider opening this back up?
Yes. Your numbers are correct. We did have it expired in June and it's not been reauthorized.
Would you consider is there a proposal on the table or considering proposing it to to restart the repurchase program?
It always, it always is something that's in the back of our minds. At this point in time, we want to invest in our business to provide a greater return for shareholders.
Okay. And it sounded like inventory is up Q over Q and therefore your cash conversion cycle continues to inch up year over year because you're making sure that you have enough inventory to fill demand. Is that correct?
That is not correct, Nehal. We haven't provided that level of detail. Cash was up somewhat higher than it was in the previous quarter. And that's pretty much the extent of what we've provided.
Okay. I'll see the floor. Thank you.
Thank you. We'll now take our next question from Mark Kelleher with D. A. Davidson.
Thanks for taking the questions. I know one of those numbers, Perry, could you reiterate what percent of revenue with Skylake? I think that was given out.
Yes. What we talked about, is X11 platforms. X11 platforms present, the Skylake. It also represents a portion of it is, UP and DP. But overall, X11 represented approximately 12% of the total processors that we shipped out.
And those processors typically carry higher gross margins, those systems, correct?
Basically, yes, they do.
So that didn't seem to help the gross margins in the quarter. Is that being offset by the memory issue being a little bit more significant?
Which? Yes. Well, as we've been saying, we're very much in the early days of the ramp, okay? The DP portion of the X11, is still ahead of us. We'll get a little bit more here in the December quarter probably improve quite a bit.
And then really the ramp starts to take hold, beginning in the calendar year. As you know, that'd be about 6 months since the launch. And that's when it starts to be a lot more allocation in the market. Gross margins overall, were impacted by seasonal utilization, impacted by geographic mix with strong China revenue. Impacted, somewhat by product mix, to more component reliance systems.
Plus, we're also in this transition phase, from a mature grantly lifecycle technology to the new ZEON Skylake family. And so that's still going on. And yes, there were some continuing component
Thank you. It appears at this time. We have no further questions. I'd like to turn the call back over to Mr. Liang for any additional or closing remarks.
Thank you for joining us today, and we look forward to talking to you again in the end of this quarter. Thank you, everyone. Have a great day.
Thank you, ladies and gentlemen. That does conclude the Super Micro First Quarter Fiscal 2018 Business Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you