超微電腦 (SMCI) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Super Micro Computer, Inc.

First Quarter Fiscal 2020 Business Update Conference Call.

The company's news releases issued earlier today are available from its website at www.supermicro.com.

(Operator Instructions) Afterwards, securities 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, November 14, 2019.

A replay of the call will be accessible until midnight, Thursday, November 28, 2019, by dialing 1 (844) 512-2921 and entering replay PIN 9981371.

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 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 First Quarter Fiscal 2020, which ended September 30, 2019.

During today's conference call, Super Micro will address the company's preliminary financial results for the first quarter of fiscal year 2020 and the company's efforts to become current with its remaining SEC filings.

References to any financial results are preliminary and subject to change based on finalized results contained in future filings with the SEC.

By now, you should have received a copy of the news release from the company 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 filing for 2017 and our other SEC filings.

All of those documents are available on 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 outlook.

At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts to ask questions.

I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer

Thank you, Perry, and good afternoon, everyone.

Our first quarter revenue will be in the range of $788 million to $798 million, which exceeds the midpoint of our quarterly guidance of $780 million.

Our non-GAAP gross margin was in the range of 16.1% to 16.3%.

Non-GAAP earnings per share was in the range of $0.61 to $0.65 compared to the range of $0.66 to $0.70 last year and a range of $0.57 to $0.61 last quarter.

Systems revenue was approximately 80% of total revenue.

System ASPs were lower year-over-year due to lower memory and SSD pricing, which impacted revenue.

We see continued demand in the channel.

We are appraised of our portfolio and first-to-market innovation, allow our partners to offer application optimized solutions to their customers.

In addition to seasonality in the September quarter, there were several factors impacting our top line revenues.

And overall industry-wide slowdown due to economic uncertainty.

Some push in purchasing from major data centers happened and pricing detaches on key components using our systems.

As we quote by our PR and industry analysts, server revenue has been down in 2019, so that trend continued for our business in last September quarter.

However, as we reached the end of this quarter, we begun to see signals of stabilization and early signs of seasonal strength from our key customers, and we began increasing our inventory to take advantages or opportunities.

Super Micro has long [known] that application optimized products will maximize our growth.

We continue to develop new products and solution offerings across major servers and storage markets, including total solution, AI machine learning, 5G, IoT and data centers.

Combining the advantages that were introduced to our green computing and resource savings platform.

We delivered completed solution offerings with Red Hat, VMWare, NVIDIA and SAP, providing certified and tested configurations that can reduce risk and accelerate ROI for our customers.

Our [outlined] (inaudible) hyper-converged infrastructure continue to be the most optimized solution for new generation solid customers, delivering the best-in-class features, support hot-swappable NVMe, flexible I/O and high TDP of Intel second-generation Xeon Scalable processors.

With SAP, we delivered [the 2 new] 4-way SuperServer as part of our Intel Select Solutions, with up to 12 terabyte of memory, that brings the power and cost saving of Intel data center system memory to the SAP HANA platforms.

We collaborate with NVIDIA on an EGX solution, allowing customers to manage their AI applications on Super Micro's extensive edge GPU product line in cloud-native environment

Moreover, we introduced a new class of 5G-related software-defined networking platform that can be optimized to deliver accelerated AI inferencing to the network [age].

On AMD side, we start shipping Super Micro featuring systems based on the second-generation EPYC processors, which power a Qualcomm or previous generation A+ systems and provide much better performance and value.

Last but by not the least, we had begun to deliver a set of [up limit specialized] system product target for mega data centers.

This product is uniquely optimized for the specific requirements of high-volume scale data center customers.

Our premium product solutions allow us to leverage our existing product design and customize performance, efficiency and cost requirement on demand.

We see a similar opportunity for cloud data centers optimized design and have A4 on the way to deliver additional up limit specialized products.

Looking ahead, we see the pace of processor-refresh cycle accelerating and have readied ourselves with the next-level product update in the coming quarter.

(inaudible), we had kicked off developing of our next-generation (inaudible) architecture for a complete permanent refresh.

These new architectures will take a full advantage of upcoming innovation of Intel new processers.

Like, PCI Gen-4, more flexible I/O, higher performance architecture and new storage form factors.

We had already started engaging with selected of our customers.

Important to achieving our credit growth, we continue to invest and grow our operational efficiencies and scale, building a stronger, global foundation.

We have increased our capacity in engineering, manufacturing, operations and service in our key strategic allocation.

This includes overall 200,000 square feet of new facility space in our San Jose Green Computing Park and more at our [Netherlands] headquarters.

In summary, although market conditions had been challenging, we continue to deliver significant server and storage innovations to the market.

More importantly, we had mobilized our R&D sales and operations to grow the discipline and focus needed to expand our market share.

Fundamentally, we are more confident than ever in the strength of our product and operational improvement, which will empower us to achieve our business growth.

And now, I will hand the section over to Kevin

Thank you, Charles.

First, I will address the current health of the business by providing an overview of our financial performance for the first quarter of fiscal 2020.

I will then make a few comments about our progress on our SEC filings.

As Charles mentioned earlier, we estimate our fiscal first quarter revenue within the range of $788 million to $798 million.

Geographies were lower on a year-over-year basis, with EMEA approximately 21% lower; Asia, 22% lower; and the U.S. 18% lower.

Our estimated gross margin range on a GAAP and non-GAAP basis were from 16% to 16.2% and 16.1% to 16.3%, respectively.

Our margins improved from last year and benefited from lower key component costs as well as favorable customer, geographic and product mix.

Our operating expenses were slightly lower this quarter due to lower reserves for bad debt, offset by the effect of annual salary increases and higher research and development expenses.

We estimate our non-GAAP diluted EPS range this quarter was from $0.61 to $0.65 per diluted share.

Due to the need to rebuild inventory this quarter for seasonal demand, cash flow generated from operations was lower than recent quarters at $5.5 million.

After deducting for CapEx and investments of $13.3 million, our free cash flow was negative $7.8 million.

Our closing cash position was a robust $239 million.

This quarter, our cash conversion cycle was 89 days.

The days sales outstanding was 43 days while days payable outstanding was 48 days, with inventory days increasing to 93.

Our cash conversion cycle target remains 85 to 90 days.

Now let me comment on the progress of our remaining delinquent SEC filings.

Last quarter, we reported that we had submitted our fiscal 2018 financials for audit.

We are now able to report that we have also completed work on the fiscal 2019 financials under both the 605 and 606 revenue recognition standards and submitted them for audit at the end of September.

Concurrent with the financial statement audit, we have continued the testing and assessment of our internal controls over financial reporting.

As a result, we have prepared drafts of our SEC filings.

The team remains laser-focused on becoming fully current on our SEC filings, which also includes the 10-Q filing for this first quarter of fiscal 2020.

As indicated previously, we will have an abbreviated Q&A session, in which sell-side analysts will be permitted to ask questions.

Operator, at this time we're ready for questions.

(Operator Instructions)

And we'll go first to Nehal Chokshi of Maxim Group.

Congratulations on solid results relative to the guidance, especially on the gross margin.

Very nicely done there.

On the guidance here, looks like, at the midpoint, you're guiding to up 5% Q-over-Q.

How does that compare to your typical seasonality?

So in general, we believe that it's similar to our normal seasonality.

As Charles outlined, we saw some signs of stabilization and a little bit of growth as we enter into -- into the next quarter.

So we believe it's kind of in line.

Okay.

And I think you gave the color on why the gross margin was up year-over-year, and I think one of the elements was component cost declining rapidly and that's certainly true on a year-over-year basis, but I was under the impression on Q-over-Q basis, there has been some pressure.

Yet you did see strong gross margin on Q-over-Q basis.

So could you tease that out as far as why did you also see the strong Q-over-Q gross margin?

Yes.

I think we had mentioned last quarter that as compared to the quarter previous to that, that still there was some mix in customer influences that are in there.

And certainly, that was the case this quarter as it rebounded back.

So we continue to look at that gross margin, trying to ensure that we make some periodic progress over time that we have talked about for quarters on quarters.

But without getting into too specific details, we're really calling out the fact that on a sequential basis, this is really going to be customer and mix orientation and it will be less of the impact on a sequential basis related to the component changes.

Understood.

Okay.

And looks like there was about $2.5 million of incremental OpEx on a Q-over-Q basis.

A, is that correct?

B, can you help guide us, which buckets we should attribute those to?

You mean in terms of...

For the September quarter, yes.

Yes.

So I called out that the key things in terms of the sequential basis were really that we had less bad debt.

And then in addition to that, as we go into the September quarter, our annual merit increases are always effective with our fiscal new year and January 1. And then as Charles had mentioned, we had some new product development initiatives that were sequentially increased quarter-over-quarter.

(Operator Instructions) Our next question comes from Aaron Rakers of Wells Fargo.

I want to first just ask you on a demand environment.

I know you talked about demand -- the demand environment being somewhat challenging but you also mentioned that you started to see signs of improvement.

There's been some kind of mixed data points on some of the hyper-scale cloud demand, some suggesting that there might be a pushout in server refresh cycles.

I'm just curious of how would you characterize the cadence of your customers as it relates to kind of server refreshes?

Do you think that there could be any kind of a pause in front of some of the timing around things like Cooper Lake, from Intel or even Ice Lake?

Just any kind of color on what you're seeing as far as purchasing behavior for the customers and particularly, the -- some of the hyper-scale customers you have?

Yes.

For sure, it's a very dynamic market and that's why we say new processor is getting available.

So as a technology-leading company, we have very strong new products available each month or each quarter.

So overall, we feel pretty positive.

As to the macro market, and the whole industry demand, at this moment, we feel it's still kind of hard to predict.

But overall, we feel not too bad.

But I think, on the backdrop, you should -- we reminded you of this a number of times that our exposure to hyper-scalers is not near as much as some of the other [comparers] that you may have in mind.

Okay.

Fair enough.

And then on the -- as my follow-up on the component pricing dynamics, I know -- just kind of thinking about the progression as you see going forward, between DRAM and SSD pricing.

There has been some indication that the SSD pricing seems to be stabilizing and maybe turning a bit higher.

DRAM, however, continues to be on a downward trend.

Just as you think about the current quarter, how would you characterize what you're seeing from a component pricing environment perspective?

Yes, I mean, after many years, improvement in our procurement department has been much stronger than before ever and also our economical scale helped us to, that's why we say NVMe and especially SSD, right?

Pricing is getting growing and [bigger] and price continues slowly dropping, right?

So both, I guess about offset in next few months I believe.

Okay.

I'll slip one final one in.

There's obviously some changes in the competitive landscape from a server-CPU perspective.

You mentioned in the -- in your prepared remarks, the progression with ROM or the second-generation AMD processors, how would you characterize your ability to maybe leverage a bit of a changing competitive landscape in server CPUs?

What are you seeing in terms of the demand profile, the appetite for AMD relative to server CPUs versus say Intel?

As I just stated I want AMD platform outperform the previous generation AMD solution allow more Qualcomm, almost double Qualcomm.

So performance advantage will sure help the product line to grow.

So we feel pretty positive for AMD product line.

As to Intel product line, again, our product line had been stronger than before ever.

So we have good feeling for both indeed.

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 comments.

Thank you for joining us today, and have a great day.

See you next time.

Bye.

Thank you, ladies and gentlemen.

That does conclude the Super Micro First Quarter Fiscal 2020 Business Update Conference Call.

We do appreciate your participation.

You may disconnect at this time.

Thank you.