Charles Liang - Chairman and CEO Kevin Bauer - SVP and CFO Perry Hayes - SVP, IR

Nehal Chokshi - Maxim Group Jake Wilhelm - Wells Fargo Jon Lopez - Vertical Group

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Incorporated Fourth 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 on a listen-only basis. As a reminder, this call is being recorded, Tuesday, August 21, 2018. A replay of the call will be accessible through midnight, Tuesday, September 4, 2018, by dialing 1-844-512-2921 and entering replay pin 3269-159. 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 fourth quarter fiscal 2018, which ended June 30, 2018. During today's conference call, Super Micro will address the current state of the company's efforts to file its delinquent SEC filings, the business and market trends from the fourth fiscal quarter of 2018, and the company's estimated financial results for the fourth quarter and for fiscal year 2018. 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 two news releases from the company that were distributed at the close of regular trading and are 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'll have a Q&A session, in which sell-side analysts will be permitted to ask questions. I'll now turn the call over to Kevin Bauer, Chief Financial Officer.

Thank you, Perry, and good afternoon. Today is the first trading day because our very good quarterly results are overshadowed by the news of our filing status. We remain undeterred in our efforts to complete our financial reports. We have worked diligently and deployed significant resources towards completing the 2017 and 2018 financial statements, but are not able to file by the deadline of August 24, 2018. This was the deadline given to us by the NASDAQ Appeal Panel when they granted the company an exception to the listing standards requiring timely filing of SEC reports. We've made tremendous progress on this matter, having completed the analysis of specific revenue transactions identified through our audit committee's investigation. To date, our cash flows have not been impacted by our findings and no transaction reviewed by the company as part of this process has involved revenue that could not ultimately be recognized, nor have we concluded that a restatement to financial result is necessary. The question you must be asking is, why is this matter taking so long? The answer is that in order to be thorough, we're reviewing transactions near the end of each quarter for similar issues, found in the earlier testing. But particularly, as it relates to the matching of purchase order and shipping terms to the timing of revenue. As we're a high volume business, this entails locating documentation that is on-site, archive or at third-parties and reviewing thousands of revenue transactions in detail using the structured approach. There are a number of issues, however, let me share an example of an issue that has arisen in our reviews. We have from time-to-time offered free shipping to customers even though terms of our agreements with those customers, provided that the customer would arrange for its own shipping company to pick the products up at our factory shipping dock. This package had the unintended accounting consequence of converting the transaction from an ex-works transaction to an FOB transaction. If end of the quarter shipments are adjusted in this way, it can cause the appropriate date for recognizing the revenue for their shipments to slip from one quarter into the next. This is one example of what we are looking for as we review thousands of transactions. The company believes the revenue recognized for review transactions is valid revenue. The main issue is the quarter in which revenue must be recognized. We have not yet determined whether the magnitude of any timing adjustment will be material to any of our previously filed financial statements. We continue to work diligently to complete the review, assess the impact, and complete our financial statements and assessment of internal controls over financial reporting. We've engaged KPMG to assist us with our review, and we are also working closely with our independent auditor to complete the job. We appreciate the efforts of both KPMG and Deloitte. Finally, we are also working closely with the agent of our bank group to inform on the testing process as well as our progress toward completing all the SEC filings. As a result, we expect to continue to have adequate lines of credit to fund the continued growth of the company. We're not able today to project the date by which we will complete this review and file all our delinquent SEC reports, but we believe that date is not too far in the future. Thankfully, however, our business remains healthy and has grown during this time, as a result of our fourth quarter reflect. Turning to a brief overview of our financial performance during the fourth quarter of 2018, Super Micro had strong fourth quarter revenue and net profit. We estimate fourth quarter revenue was in the range of $986 million to $996 million. It was approximately 39% higher year-over-year. With this strong quarterly revenue, we achieved a fiscal year revenue of approximately 3.3 billion. We estimate fourth quarter non-GAAP fully diluted earnings per share within the range of $0.75 to $0.79. We grew revenue in all market verticals with key markets growing significantly year-over-year. Global 2000 more than tripled year-over-year. Internet data center more than quintupled year-over-year and non-Internet data center grew nearly 50% year-over-year. Accelerated computing was up over 90%, embedded grew 20%, storage and channel were up 9% and 3% respectively. On a year-over-year basis, the US enjoyed the highest growth of 48%, followed by EMEA that grew 28% and Asia-Pac that was up 24%. Other regions grew 56%. Our estimated range of gross margin on both the GAAP and non-GAAP basis was from 12.8% to 13%. Our customer mix primarily affected margin this quarter. We estimate non-GAAP EPS range this quarter was $0.75 to $0.79, which was a record high and almost double year-over-year. For the fourth quarter, we estimate cash generated from operations was $38 million. After deducting CapEx of $8 million, we estimate free cash flow of $30 million for the fourth quarter. Last quarter, we mentioned our effort to manage our working capital. This quarter, we reduced our cash conversion cycle to 82 days from 99 days in the prior quarter. We achieved improvements in days sales outstanding due to collections and improved shipment linearity and reduced inventory days by being more precisely timing purchases, that was offset by reducing days payable. All in all, our business is strong and we improved performance by working diligently, concurrent on filing our financial reports. Let me now turn it over to Charles for his comments.

Thank you, Kevin, and good afternoon, everyone. Despite our substantial efforts and progress to complete our SEC filings, I'm very disappointed that we denominated a filing payment. Personally, I cannot convey how much pain I feel in this unfortunate development. This, however, has not affected my confidence in Super Micro's strong foundation. In the meantime, we are achieving record high revenue and profit, and continue to introduce new unparalleled product innovation. We are committed to completing our SEC filing as soon as possible and making sure this problem will never happen again. Completion of the audit is our first big step. We have been investing to further improve our people, skill, process and to meet the highest financial standard and to meet the need of rapidly growing USA-based global technology companies. We need to make sure our infrastructure has a strong asset that accelerates our growth and deliver flawless customer experience. A change is being made and already improve our business operations. We add new management across the business and financial operations of the company. [indiscernible] and experience in large scale operations. We also add a new Chief Compliant Officer and a new Vice President of Internal Audit, and strengthened our revenue recognition team. [indiscernible] 31% in the last year, despite the disruption caused by the continued delay to our 10-K filing. Today, Super Micro's business and product technology leadership has never been stronger. Our fourth quarter revenue will be in the range of 986 million to 996 million, approximately 13% higher year-over-year, and was a new record high. With this strong quarterly revenue, Super Micro surpassed 3.3 billion for fiscal 2018. Record revenue and profit are strong indicators of our continued success of our product and market focus. We continue to expand our technology leadership with new products that deliver game-changing performance. [indiscernible] and Big Data applications. For AI machine learning, we have partnered with NVIDIA to view the most powerful platform. That combines 16 Tesla V100 GPUs and 2 PetaFLOPS SuperServer, partnered with NVIDIA in the same store. We delivered a new class of high data throughput that is [indiscernible]. That can deliver up to a petabyte of high-performance All-Flash NVMe storage in the compact 1U system and can deliver up to 18 million IOPS. I am more confident of our abilities and technical opportunities than at any time in our 25-year history. We are clearly focused on meeting our obligation for SEC reporting and operating low cost business. We have many great things going on at the Super Micro, as we continue to bring to market our new innovation. The resource facing technologies are enabling great opportunities for us, especially for the upcoming 5G transition, enterprise Global 2000, and AI machine learning. I am looking forward to sharing more of these exciting opportunities, which will be in future quarters. And now, I will hand over to Kevin.

As indicated previously, we will have a Q&A session with sell-side analysts, who will be permitted to ask questions. I would like to remind you that your question should be directed to the business update that we have just provided. We may decline to answer questions relating to the audit committee investigations or the delayed filing of our 10-K because of pending litigation. Operator, at this time, we're ready for questions.

[Operator Instructions] And we’ll go first to Nehal Chokshi with Maxim Group.

Thank you and really phenomenal results. But Kevin, as you know, the stock is reacting to delayed filing and really great color on some of the examples that's going on. You made a statement at the end that you believe that the ability to file these filings is not too far away, but in the second press release today, it does say that there is still significant work to do. So, can you help bridge the delta between the verbal comment and what's in the filing -- and what's in the 8-K?

Yeah. So, I think it is true that we still have a substantial amount of work to do. I think what we've said in terms of being able to see it in the future is that, now that we are later in the process, we actually have pretty good visibility on what it takes to remain to be able to complete the process. So that's how I would string them together is that it's one of better visibility, but there's still a fair amount to do.

Okay. So, the process that was defined on what needs to be done to review a transaction was established relatively late, relative to when the investigation started about a year ago. Is that fair to say?

Well, certainly as the results of the investigation came in, we were able to see a little bit more in terms of the processes that we were need to do, so certainly it was evolving.

Okay. And just to be clear, you said, significant transactions left for review, but you've already reviewed hundreds of transactions. So, are you only a fraction of the way through, are you like 10% to 20% the way through or are you more like 80%, 90% of way through, what needs to be reviewed?

Yes. We really can't go into that level of detail. What I can share with you is that we've taken the approach of largest transactions and are now going towards smaller transactions.

Okay. Understood. So onto the fundamental stuff, at the midpoint for the June quarter, you had 25% Q-over-Q growth, and that's about 1,000 basis points above your typical seasonality. And you did see gross margin tick down at that Q-over-Q, so can you parse that between potential drivers of mix, component, input costs, competitive pricing, and then an upside lever that all these three should be also offsetting -- should have been volume as well. So maybe you can also comment on how much of a positive factor volume would have been, if the other three items were held constant?

That's a lot. So, I’ll tell you that, we are certainly aware of the fact that the industry is growing. We are benefiting from that. We are happy with the significant enterprise wins that we are getting. I will share with you that as I looked at the margin mix, a lot of it had to do with just the quarter-over-quarter mix in terms of some of our customers. So some of that is related to the products that they buy, others are related to the aggressiveness sometimes that we have on larger deals. So I think that's -- those were the two primary factors.

Would you say that the pricing environment has become more competitive relative to a quarter ago?

I wouldn't say that universally, no.

We’ll go next to Aaron Rakers with Wells Fargo.

Hi. This is Jake Wilhelm on behalf of Aaron Rakers. Congrats on the strong results. I was wondering if you could give me some color on what you're seeing with AMD's traction, with their [indiscernible].

Yes. You can see the AMD products have been getting popular, and we ship kind of much more products than last quarter. So the change should be continued.

Thank you. I was also wondering if you could give me some color on Intel's Optane product and the traction you're seeing around that with Intel's 10-nanometer challenges?

Yeah. We continue to ship Intel Optane technology. Again [indiscernible] people want a lower latency, kind of higher bandwidth and Optane technology provides excellent solution in that area. And we have a great product line, we’re the earliest player in the market. As to 10-nanometer technology from Intel, as of this moment, we tried to observe and overall we feel very optimistic still.

[Operator Instructions] Let’s take a follow-up from Nehal Chokshi with Maxim Group.

All right. Thanks. So your midpoint guidance is down 15% Q-over-Q, which is 1,000 or 1,500 basis points more than what I'd consider seasonal. So can you give some color as far as what's below seasonal guidance? Obviously, you did have some incredible Q-over-Q growth over the past two quarters, but just wanted to make sure there's nothing more to it than that?

No. I think, our primary view of this quarter is really seasonal, I don't think there is anything unusual as it relates to the guidance. Hopefully, we'll do well.

Now, with our guidance, 810 million to 870 million, and that would be -- this quarter, September quarter, will be still a strong quarter basically.

Okay. And non-GAAP OpEx plans for September quarter. Can you give any color there?

Yeah. We're not giving any guidance other than revenue at the moment.

Okay. All right. And are you going to be able to provide some color on system volume, system ASP, node volume, and node ASP for the June quarter?

No.

We’ll go next to Jon Lopez with Vertical Group.

Hi. Thanks. I'm wondering if you can just spend a moment, because it's not really that apparent to me by the wording that you offered in the release, specifically you referenced in the second press release, the review of hundreds of transactions and then in the same sentence, the conclusion that you don't believe a restatement is necessary. So I guess what I'm hoping you can expand upon a little bit is, what exactly have you found as you've gone through these hundreds of transactions and what are the points of focus and what in that work has led you to conclude that a restatement is not necessary? And then, last part of that, what would make you conclude prospectively that one might be necessary.

So the predominant pattern that we're seeing is that there are ins and outs across the quarters. And so, so far, they've kind of netted each other out to a great degree and that's really what the primary modus operandi is.

Okay. And could you just speak a little bit more to the progression of that analysis over the period that you've referenced, i.e., fiscal '15 through '17? I mean, is it fairly uniform across these periods or do you see more congestion in one period versus another?

Yes, I really can't speak to that, but by virtue of the fact that there's not been significant distortions, it doesn't say that there's a big difference in the pattern.

Okay. Understood. The second clarification I was hoping you could offer is -- you don't reference fiscal '18 at all. And I understand that’s not a period that you've provided SEC filings, but are you reviewing transactions for FY18 as part of this as well or has FY18 been for lack of a better term immunized just based on some of the focus and activities that went into motion when you discovered this issue?

Well, I can share with you that as we've gone through the year and things have come to like the investigation, we have had our eye on that as it relates to how we have estimated the quarters over ‘18. So we have incorporated some of that. We still will have to go through the transactions at the end, but we've been improving as you go so to speak.

Understood. The next question I have was just your commentary around the credit lines. My recollection and it’s a little foggy, my recollection is that there was some contingencies tied to the filing of the SEC documents. Can you just revisit that topic quickly? Are there procedures or do you have to go through separate processes on the credit side now that this deadline won't be met? And then what would be the timeframe over which those would be transitioned to outcomes?

Yes. So the credit line, the way that it was structured is that it was a one-year term. If you remember, we closed this in April. So, therefore, it had one-year term or completion of our delinquent filings. And then upon the earlier of one of those dates, we would be able to convert it into phase II, that phase II actually allowed for an expanded credit facility, so that's the nature of it.

[indiscernible]

That's right.

No. That's right, but that could change. I mean, your access to credit could change I suppose as driving that. And it sounds like what you're saying is that you still have some amount of duration on that one-year term?

That's correct.

Okay. Sorry, could you just remind like approximately when does that duration end?

It's like the third week of April, I believe.

2019.

Yeah. 2019.

Okay. Understood. And so, at that point, for whatever reason the situation is unresolved, then there would be a separate process you'd have to undertake from that perspective?

Yeah. We're getting a little ahead of ourselves.

Sorry, just a couple of questions on the business, real quick if you wouldn't mind. Can you guys just offer a rough split between what your service systems business did in June relative to the accessories portion of the business, compared to subsystems, excuse me?

Yeah. So our systems business was roughly about 84% in the last quarter.

Okay, 84%. And would you expect a material change in the segment splits looking into September?

The systems business is still continuing to grow stronger.

I'm sorry, the systems business will continue to outgrow the subsystems business?

You're talking amongst verticals?

No. I was really just looking at the split between the two reportable segments, you have the service system segment in every subsystems business, the other 16%, I'm just asking as we go into from June to September, are you anticipating any kind of sizable shift between those revenue buckets?

No. It's been a slow increase towards systems, and it would continue to have that kind of movement.

Okay. Understood. And sorry the last question on the gross margin side. I think I heard what you said earlier, I guess, I'm just looking for a little bit more on trajectory. I mean, you've obviously seen some portions of the component bill of material become a little bit more favorable. Your gross margin obviously went the other way. It sounds like that was vertically related. I'm assuming that was hyperscale to an extent. But as we just think about the next several quarters to the extent that bill of materials buckets continue to trend favorably, is there a reason that you wouldn't expect your gross margins to begin to trend back up toward the mid 13's, low 14's. I mean I'm not asking you to quantify that range, I'm just saying directionally would you expect improvement as the cost side continues to be a bit more favorable.

Modest improvement overtime.

And 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 everyone for joining us and see you very soon. Thank you. Have a great day.

Thank you, ladies and gentlemen. That does conclude the Super Micro Fourth Quarter Fiscal 2018 Business Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.