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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 30, 2018. A replay of the call will be accessible until midnight, Tuesday, February 13, 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.
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 second quarter fiscal 2018, which ended December 31, 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 other results of the investigation on the company's historical financial statement, 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 30, 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 31, 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. 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 or 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 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 were in the range of $840 million to $850 million surpassing our quarterly guidance and exceeds our long term guidance of reaching the $3 billion of run rate by December 2017.
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 service continued to increase in revenue and non-GAAP profitability.
We were also able to improve our non-GAAP operating margin and EPS by increasing over side and control of our operational spending growth. In this seasonally strong quarter we achieved over 30% revenue growth year-over-year and we saw the [past supplement] throughout our quarter. We grew in all market vertical including accelerated, AI, machine learning, storage, IoT embedded, Internet data center, cloud and particularly strong growth with large enterprise customers.
Our completed season business reached more than 175,000 nodes which result in an increase of our season business to approximately 77% of our 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 Tesla Intel scalable process of family. The Skylake product now grew more than 100% quarter-over-quarter. With the new X11 Skylake systems, we introduced much leading innovation, the BigTwin system featuring 4 new processor node in 2U and truly a product unmatched in the industry.
It is the industry's only non-comprised multiple solution that delivers the best-in-class hyper convergence and efficiency, while also supporting fuller performance 205 watt 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 fully enhanced the product with [indiscernible] design delivering an extra 30% performance gain in certain applications.
NVMe flash storage continues to play a major role in our surface with our open traditional storage platform growing 47% year-over-year. Super Micro's new All-Flash NVMe 1U JBOF NGSFF All Flash and 1U SuperServer with support for 32 3.0 NVMe or Internet ruler NVMe or 36 Samsung NGSFF NVMe more than key product All-Flash storage capacity of previous 1U solutions and we are provide petabyte scale storage in a single 1U system.
We also released new All-Flash NVMe system design for high performance storage delivering up to 18 million IOPS with latency under 10 microseconds. While orders are steadily growing large enterprise customer base, we announced that to get any certification of SAP HANA on Supermicro 2U for popular SuperServer with up to 6 terabyte 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 advance analytics alongside high speed transaction and get accurate real time routes.
We want to partner with NASA to have expanded their research capability. To meet NASA's Center for climate simulation needs for expanded advanced computing and data analytics used to start the earth, solar system and universe. We deployed a turnkey next-scale solution already built and integrate at our Silicon Valley headquarter.
The Super Micro effective base solution have expanded NASA's research capability with the combination of density, system performance and optimized cost bringing an additional of 1.5 better flow to NASA research.
11 years ago we introduced the concept of green computing with power optimize and energy efficient systems. This quarter we were pleased to take a green computing to the next level with industry first resource savings architecture that expanded green computing beyond just power savings for our overall conservation of various inter resource.
The resource saving architecture contributes to a greener data center and deliver property savings in operating cost and up to 40% savings in hardware system application cost. It reduces resources consumption using versus depreciation and depreciation to more optimal performance quicker.
The architecture is a beauty in key Super Micro innovations including our this aggregate MicroBlade design the resource pulling of our latest shaper and storage server product [indiscernible] and our open industry standard next scale design management are aware.
We also expanded our Silicon Valley manufacturing headquarter with a new rack integration facility to support the increase capacity of rack scale deployment. The facility features one order largest clean energy, fuller autonomous rack scale integration and manufacturing size.
In summary, Super Micro's momentum our strong growth increased in our second fiscal quarter of 2018 and we exceed our target for $3 billion annual run rate based on our customer wins and from pipeline 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 at this time to introduce Kevin Bauer, our new CFO. Kevin joined Super Micro over a year ago as the Senior VP of Corporate Development and Strategy. Kevin had over two decades of experience in financial leadership including multiple CFO role for high tech company 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 comment. 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 Senior Vice President and Chief Financial Officer at Pericom Semiconductor Corporation from February 2014 until its sale to Diodes in November 2015, and 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 2007, I've 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 to 780 million for the third quarter of fiscal year 2018 ending March 31, 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 analyst will be permitted to ask questions. I would like to remind you that question 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 the time we’re ready for questions.
[Operator Instructions] And we will first go to Aaron Rakers from Wells Fargo.
This is Joe Quatrochi on for Aaron. Few questions if I could, first I think last quarter you gave us kind of 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?
Yes, certainly we can do that. Again these are preliminary numbers, so these are our best estimates at this time. Storage was about 22% and of our total revenues and that is up about 22% year-over-year.
Our Internet data center cloud vertical was over 11% and 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 so that’s continuing to show a lot of momentum.
Our IoT and embedded was approximately 9% and that was up also about 23% year-over-year. Enterprise was approximately 7% and continues to show very strong growth based on this huge revenue base that we have for this quarter.
Last but not least is our channel and that's about approximately 42% or so. There is a little bit of overlap as you know from prior times we spoken that some of our businesses captured in channel and where they do some things for some of our customers. Is that helpful?
Yes, that’s very helpful. Thank you. And then maybe just a follow-up to that, when we look at the due performances 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 growth will continue to be very strong other than there is some component shortage global wide. So we believe growth will be continued pretty soon.
Just would add here 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.
And then maybe just one more and I’ll see the floor. The management resignation that you outlined in the press release how - specially related to the sales leadership. How do we think about those relative to the audit that was just completed are those related or they're separate and then how do we think about your ability to forecast revenue kind of going forward?
So, just as you know - that we wouldn't comment on the audit committee investigation and the delayed financing 10-K and definitely we’re not at liberty to discuss anything related to the audit committee. So I’m going to have to decline your question on that, but with regard to 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 only today. He is a great guy. He in the company for many, many years. He is often stepped into the role when people were absent in traveling. So he has a wealth of knowledge about the company and how it operates.
With regard to forecasting future, Kevin would you like to make a couple of comments.
Yes, 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 kind of really focus in terms of our estimates for our top customers.
So I think we have the wherewithal and the bench strength to be able to do that well in this time of transition.
In past I mean in that solid four years we had been - we are prepared for Supermicro 3.0 so which is higher and change not for internal sales expertise. So our team is becoming much stronger than before ever.
And our next question will come from Mark Kelleher from D.A. Davidson.
Congratulations on very strong revenue result, I kind of expected a little more to drop to the bottom line. Could you talk a little about gross margin, your expectations there, I know we kind dipped again memory pricing maybe worked that in. And then talk about the operating lines if you can in terms of, is there increased spending I know you said you’re going build out and you are building up 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 have been growing very strong. In next couple of quarter we are continuing our stronger trend. However, our memory price still go in higher unfortunately. So net margin gross margin have been about flat, I guess like so other than that our business have been very strong and we foresee a very strong growth in the next few quarter, at the 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.
And again we're still in the Grantley lifecycle technology. So, as Charles mentioned in his comments that our Skylake grew 100% but it was also a low base. So the big part of the ramp on Skylake is still ahead of us. We said that now for the last several months that beginning 2018 we will start to see that that go higher.
And then 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.
Just one last one the tax rate with the changes in the law. What tax rate should we be assuming?
So I think as we go forward our tax rate will probably going to be in the mid-20s or so.
Our next question comes from Mehdi Hosseini from Susquehanna Group.
This is David Ryzhik for Mehdi. So 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 think up on that to see 5th March is really like a deadline that you’re working with for the 10-K?
David we are working as hard as we can with - in conjunction with the independent auditors to try and complete this process as soon as possible. But as we have 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 13 and our bank line with Bank of America we have an agreement which we've previously announced that sinks up with that March date.
And I mean 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.
And so we came across some order from TSMC to Super Micro, there is some public filing. Just wanted to get a sense of what therefore I think it was - there was a $40 million order to Super Micro in December quarter and maybe we saw follow on orders. So just wanted to get a sense of what those order are for is that Internet data center business or not and how sustainable is that demand from that customer?
Basically we don’t comment with specific customers with business condition. However I'm happy to share our big win with lots of large enterprise account had been continuing going very strong. So we do feel very positive. We will continue to grow in this segment. It’s kind of indeed many enterprise customer had been growing business with us.
And you touched on the component environment, would just love to get sense on how you see DRAM and NAND today relative to your business and how you anticipated impacting your March quarter?
Yes, DRAM price continues to grow temporarily, and other components even [indiscernible] we did see some shortages global wide. Basically our growth have been much faster than the average overall industry. So we did see a shocking challenge but with getting stronger relationship with our vendor. So there are some challenges but I believe it will be okay.
And just wanted to get a sense of - there was a public discussion around the meltdown inspector 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. I mean our Skylake indeed grow more than double over last quarter and we did see a strong growth this quarter and next coming few quarter. So, our overall Skylake will go strong but overall next generation business is strong. So especially we have lot of embedded IoT customers. So overall our growth will be pretty smooth I believe.
And then 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 continues to grow year-over-year stably and some quarter grow more, some quarter grow less but overall next generation storage will continue to grow strongly.
[Operator Instructions] We'll now go to Nehal Chokshi from Maxim Group.
Congratulations on the strong results and at least dropping some of that rather seeing the 10 million OpEx year-over-year increase result and then operating profit increase on a year-over-year basis, so that’s good to see. The guidance for the March quarter brought while relatively broad range at the midpoint and price will be done 12% Q-on-Q which is an average I think is usually down the mid single digits. So what greater levels of seasonal decline that you guys are projecting?
We believe growth will be strong in March quarter even if this seasonally slow quarter but because of that shortage, I mean component shortage global wide so we try to be more conservative not over a big range 700 to 780.
Okay. And then…
Nehal, I think just add as well, as you know - for the industry historically there's lot of seasonality in this March quarter right with the lunar New Year and some of this other events that are happening. So it’s a little bit hard to gauge with that, plus all the comments that Charles made.
And then what was the reason for the resignations of the sales leadership?
Nehal, appreciate your question but I don't know whether you're listening earlier. We’re not at liberty to discuss the audit committee investigation.
So I 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. So, 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 and we are not going to discuss the audit committee investigation.
And then I did have one more question which is audit related but I think it's clarification so hopefully you can answer but just to be clear - what was close about the audit committee's investigation was that it was purely on the revenue recognition timing is that correct did I recall that correctly?
That is what we have said in previous press releases.
And 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're looking forward to a strong 2018. Thank you everyone. Have a great day.
This concludes today's presentation. Thank you for your participation.