Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Micro Computer, Inc. Third Quarter Fiscal 2018 Business Update Conference Call. The company's news releases issued earlier today and are available from its website at www.supermicro.com. During the company's presentation all participants will be in a listen only mode. [Operator Instructions] As a reminder, this call is being recorded, Thursday, May 3, 2018. A replay of the call will be accessible until midnight, Thursday, May 17, 2018, by dialing 1 (844) 512-2921 and entering replay pin 2033-880. 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 Supermicro's business update conference call for the third quarter fiscal 2018, which ended March 31, 2018. As announced in our press release earlier today, the company has completed the previously disclosed investigation conducted by the audit committee. In furtherance of the preparation of the financial statements, the audit committee is overseeing additional testing that the company believes is nearing completion. To date, the company's cash flows have not been impacted by the findings of the investigation or the additional testing. Additional time is required to analyze any impact of the results of the investigation and additional testing on the company's historical financial statements as well as to complete 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. Otherwise known as the 2017 10-K. The company presented an updated compliance plan to the NASDAQ stock market hearings panel on April 26, 2018. And the company requested an additional exception period for continued listing of its common stock on the NASDAQ Global Select Market, through August 24, 2018, in order for it to complete and file its 2017 10-K and subsequent delinquent SEC quarterly filings. The company is unable at this time to provide a date as to when the 2017 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 adjustments. The company intends to file its quarterly reports on Form 10-Q for the quarters ended September 30 and December 31, 2017, and March 31, 2018, promptly after filing the 2017's 10-K. Based on these delays, during today's conference call Supermicro will address business and market trends from the third fiscal quarter of 2018 and…

Thank you, Perry and good afternoon, everyone. Let me summarize the third quarter. Our third quarter revenue will be in the range of $785 million to $795 million, which surpass our quarterly guidance and represents approximately 26% increase year-over-year. This was the sixth straight quarter of double digit -- 20%-plus growth, which demonstrates the success of our Supermicro efforts to scale our people, process and operations to support strong customer demands. On a year-over-year base, we grew in almost all market verticals, including growth of 102% in accelerated AI machine learning. 244% in enterprise, 58% in Internet, data center and cloud, 9% in IoT and embedded, 14% in channel and 15% in storage. In a traditionally soft quarter, we were able to succeed despite shortage of both minor and key components. But results could have been stronger even not for the component shortage and supply chain uncertainty. Our systems revenue reached 80% of total sales, demonstrating our customer confidence in our integrated products and total solutions. The total number of nodes shipped last quarter was up by 13%, compared to last year. We shipped over 1.2 million total units, including subsystems and completed systems in 2017 calendar year, and we are also recognized as the third largest provider of server in the world by IPC at the end 2017. ASPs of node grew 28% over last year. Due to increased demand for fully integrated systems with Supermicro qualified and validated components. Most of them notably the SuperBlade and the [indiscernible] Twin family were in high demand and contributed to higher ASPs. The Twin family was 30% of total revenue and was up 72% year-over-year. The SuperBlade was up 470% compared to last year. Other higher ASP products including rack solutions, which was up more than 300% and other systems that…

Thank you, Charles, and good afternoon, listeners. In addition to the growth rate Charles highlighted on a year-over-year basis, I'd like to provide a longer-term view of our performance. Our success as the third largest supplier in a growing market, it's evidenced by our performance in the following areas, by comparing with the last 12 months to the preceding 12 months. In other words, the last 12 months, as of March 2018 revenue, compared to last 12 months, as of March '17. In the area of accelerated AI and machine learning, our last 12 -- our last 12 months' performance was 148% over the previous 12-month period. In Enterprise, our last 12-month performance was 162% over the previous 12-month period. In IoT and Embedded, our last 12-month performance was 19% over the previous 12-month period. And in Storage, our last 12-month performance was 28% over the previous 12-month period. Turning to the quarter and sequential comparisons. This quarter we saw our strongest regional growth in EMEA, that was up 63%, offsetting slow performance in China due to the lunar new year holidays. The U.S. remained our biggest market with approximately 46% of revenues. Our estimated range of GAAP gross margin is from 13% to 13.2% and includes stock-based comp of 0.4 million and this quarter accelerated building depreciation expense of 2.6 million, that's related to a partial demolition of a building in our new green computing park. Without these two items, our estimated range of non-GAAP gross margin is from 13.3% to 13.5%. Despite continued component pricing pressure, our gross margin remains stable. I'd like to make a few comments in specific areas of progress made over the last quarter. In financing, we recently closed an expanded new credit facility for an amount of up to $250 million. That increased…

[Operator Instructions] Our first question today will come from Mehdi Hosseini with Susquehanna Financial Group.

This is David Ryzhik for Mehdi Husseini. Charles, regarding the enterprise, it seemed pretty strong, 244% growth. Can you offer any more metrics around maybe customer growth? Whether that is solely in North America or globally? Just any other insights would be helpful, and I had a follow-up.

Yes. In enterprises we continue to grow very strongly. Primarily as U.S. based, because of our on-site service and kind of management sort of we all ready now and we also start to extend to Asia and Europe. So, it's kind of global available now. And we anticipate the strong growth to continue.

And just on gross margins, would you be able to comment on component conditions? I guess, your estimate for gross margins suggests, maybe, flattish -- you see revenue tick down seasonally but year-over-year you grew revenue very strong and you noted that China was a little weak in the quarter. So just wondering, what hampered your gross margins from kind from growing -- from expanding more, given the volume?

As you may know, DRAM and SSD price is getting stabilized, especially as SSD is slightly dropping now. So, this is we're ahead -- or looking forward at gross margin as ERP. And plus, our economical scale continues to grow, they were ahead too.

I think one other little unique item for the quarters is that we took a little bit more in E&O provision as well.

What percent of systems were new processors? In the March quarter? I think you've provided that in the past?

It is 100% [indiscernible].

So, we're talking about Skylake?

Yes.

So, it looks as if -- as a percentage of revenue for Skylake this quarter was roughly about 18%.

And it came from stably growing in last year.

I think it was 12% a few quarters ago, any reason why it's not accelerating further? Or you guys just think that the tail is going to be longer? Or when do we reach that 30%, 40%, 50%?

I guess it's still maybe two quarters away. Talking about 40%.

[Operator Instructions] Our next question will come from Aaron Rakers with Wells Fargo.

So, I want to go back to the component side of the equation, as you look out over the next couple of quarters. What -- you mentioned that SSD pricing starting to come down, I think your word was slightly, how are you seeing component pricing and availability play out? Not just out over the next quarter or so. But looking into the second half of the year, there's been some -- some questions about whether or not, particularly, [Indiscernible] flash and DRAM would tighten back up into the second half?

Yes, as you may know, right. DRAM continues to have a certain shortage. But much better comparison than before. While -- they see kind of a pricing is gradually dropping now, so that means that the price is more than enough. However, we did see global other components in shortage, including PCB and material and all others small components like PPL. So, it was surprising. But that looks like those small components shortage may continue for many quarters to go.

And can you quantify how much of an impact that has had on your ability to generate revenue? How much more revenue would you have generated if it weren't for some of the component shortages?

I would have to say that more components global shortage had impact our revenue last quarter, even the March quarter. But looking forward, we continue to enhance our relationships and our effort to create a better relationship and a better safety inventory. So hopefully, that impact won't be too big.

And then kind of a couple of other quick questions if I can. It looks like your cash balance continues to kind of come down here a little bit. You're definitely doing some things on the debt side. So, I'm curious of how we should think about, it looks like utilizing your revolver with -- while still having about $140 million in cash. So how am I thinking about, I guess, why use the revolver? How do I think about the capital management side for the company?

Yes, so under the new revolver as I mentioned we, upon getting funding, we actually drew down less than what our existing balances were. And what I was trying to signal to you, as we go forward is that our cash balances will probably be smaller than they had been historically. And we're going to be borrowing just in time to a greater extent so that we can mute the interest cost impact of the rate while we're in this period of where the rate is more expensive.

Yes, at the same time, the group ARPU had been very stable -- stably growing, so I personally do not feel cash flow will be a pressure. So, with the new loan system and systems that are here, the cash flow should not be an issue...

And it looks like your cash balance is more or less flat sequentially so I apologize for that misstatement. The real final thing for me would be, just remind us again as you kind of build out, it sounded like 2 million square feet of manufacturing capacity, how we should think about the company's current capacity situation relative to your systems business? Just remind us again, your total capacity in terms of what you can produce on a systems level?

Yes. As you know. We have been faster-growing company from the subsystem to completed system to completed solution and now completed rack, high-speed and kind of completed data center solution. So, we have been growing very aggressively. And that's why economical scale has been always a challenge. The good thing is in all the area I just mentioned, including total solutions and rack scale, now our economic scale has been much better than before. And situation can be only better. So that's why those capacity we prepare will be a big help for our future growth.

So, Aaron, as you know prior to this additional building, which we talked about today on the call. We had a capacity in the neighborhood of $3.5 billion. And that fit nicely with the run rate that we're on. With the additional capacity, we're above that now, we're more in the range of $4 billion to $5 billion.

[Operator Instructions] And we'll take our follow-up from Mehdi Hosseini.

This is David again. For storage, would you be able to provide a little insight into next gen versus legacy, what the growth rates were?

Yes. So, are you talking about period-over-period?

Year-over-year.

Year-over-year. Yes. So, as it relates to year-over-year in terms of [IBC and non-IBC.] Yes. So, I think, quarter-over-quarter, year-over-year. So non-IBC, I think, enterprise, as Charles highlighted, was 244% and enterprise was like about 54%.

Sorry, I was referring to the storage business, just within storage there's legacy and then there's next gen?

I am sorry. Yes...

Storage, I guess, over all, is about 15%, okay? and...

Yes, I'm sorry. Traditional up about 29% and next gen about 2%.

Okay. Any -- are you seeing anything in the market for NexGen? For the slower growth, hyper converged All-Flash, you know anything that would account for some of the softness?

Yes, I guess, overall talking about next few quarters or next few years. We will continue to have a strong growth on both sides. Traditional storage and next gen. Last quarter, specifically 2% only for next gen, I guess is just a coincidence. Though overall there will be a continuous strong growth, both Traditional and next gen.

And just one for Kevin, just if you can provide an update for your cash cycle efforts, any measures that you've taken already. And when we can expect improvements to the cash conversion cycle?

Yes. Naturally that's going to take some period of time, as I mentioned earlier, we worked on the collection side, being a little bit tighter in terms of not shipping until we saw customers become current, just basic blocking and tackling. On the payment side, we worked to tighten up when we pay customers and then, as I said earlier, we're being more precise about when we bring in inventories, so to the extent where maybe we brought in stock for the whole month in the beginning of the month, I am exercising the organization to be a little bit more just-in-time as it relates to when we bring in inventory. That's going to take some time to bear fruit. So, stay tuned.

I mean as you know we are quickly grow in enterprise and enterprise, we provide total solution. That's why the cash here cycle time is a bit longer. However, we'll continue to work with our customer for kind of better payment terms and we got a very good support from some enterprise customers basically.

And we've had some suppliers help us out too with terms being a little bit longer.

So overall cash flow should be safe.

Your next question will come from Michael Staiger with Odeon Capital.

Are you guys seeing any increase in RFPs for designs that incorporate GPUs or ARM-based servers? And if so, where would you expect those segments to break out in the future on a percentage revenue basis? And would they be accretive to your current programs or would they be a replacement or a substitution of like the traditional builds that you're doing? And what will the gross margin profile look like on those as well?

Big question. So, when it comes to GPU, that's included in our high-performance computing or in AI. So, we just shared that year-over-year that grew 102% so that's within our current tracking. So, you'd want to keep your eye on that.

Are ARM-based servers part of your build cycle right now or...

We do not ARM-based.

That's a no?

No ARM-based.

Our next question will come from Nehal Chokshi with Maxim. And your line is open. Please go ahead.

I've been skipping between calls so this may have been asked before but with your -- congratulations on the debt raise. And I'm wondering what kind of number one, where their other banks that actually participated in the debt raise or did they just simply indicate interest and Bank of America is responsible for all the debt that increased that capacity that you have right now?

Nehal, now I'm going to answer that question. The syndicate that we had actually was, as you pointed out was, broad. We increased a number of our relationships with a number of new banks that joined and in addition to that, I will also tell you that the commitments were oversubscribed and we had to cut back. So, it worked out very well for us. Not only did it increase the facility size but also new banking relationships for the company.

What kind of due diligence were they able to do, do they have full access to the investigation that was done? And then the follow-up question is, I just want clarity on what does testing mean? I'm not too sure what that means.

I'll answer the first half of that. And I'll let Kevin answer the second half of that question. So, with regard to the bank group, as is typical, they are under NDA kind of arrangements with us and so we could provide a bit more information to them than we could to investors who are not under an NDA. So, yes, a little bit more information was provided.

In addition to that we held weekly meetings with them where we showed our cash flow and they saw how we, as a new team, managed cash and were very impressed by that. So, I think they gained comfort over the fact that our cash flow continued to be strong and came to their conclusion. As it relates to the additional testing, I'll remind you that we're not going to be answering questions about that. But it's just the continuation of the process to get our arms around all of the issues that occurred during that timeframe. So, as we said, we believe that we think we're nearing completion there and we're working in parallel with other teams to be able to our get our filings done as expeditiously as possible and we'll leave it at that.

Our next question will come from [Jon Lopez] with Vertical Group.

I have a couple of quick ones if you guys don't mind. The first one, the data center -- the internet data center vertical, looks like it was pretty healthy. I know the disclosures have gone a little bit all over the place but it looks like it was comfortably double digits sequentially and up, as you guys said, 58% or so year-on-year. Can you just talk a little bit about what's driving that and in particular are you seeing any resurgence in what used to reasonably large customer for you after they took a break for a while there?

All our customer continued to adopt our product and we also continued to win more new customers and the key reason I believe because our green computing, followed by resource savings. So, the green computing and resource savings solutions is not just save customers energy costs, initial hardware acquisition cost. But also, I mean [indiscernible] and also kind of help our mother earth from its pollution. So, all are positive factors. And we believe we will continue to grow strongly in those areas.

So, it sounds like -- to rephrase what you said, but it sounds like that's a reasonably diversified kind of resurgence in that segment, is that a fair way to characterize it?

Yes. Again, most kinds of our multiple like Twin and the Twin Pro and BigTwin product 9 as we're including continued growth resurgence as you describe the customer coming back and then we've had a sprinkling of new customers too.

Indeed, a major impact, a negative impact in last few quarter is the shortage. Kind of memory shortage, SSD shortage followed by a small component shortage. So, we have been suffering a lot before and [Indiscernible] quarter for shortage and issue and the good thing, the situation is getting better.

That actually hands up nicely to my second question, which is -- I know you guys aren't going to give us explicit guidance but just conceptually, given that we're seeing a little of leveling off and some easing in memory, which is reasonably large for you as bill materials and I understand some of the problems in other places like capacitors and things like that but those I think are reasonably small, certainly relative to memory. So, I guess the thrust of my question is, as the year progresses, is it reasonable for us to see the gross margin lift from this kind of flattish range you've been in from the last three or four quarters or are the headwinds in those other buckets enough to prevent that?

In terms of shortage and the component pricing, I believe looking forward, next few quarter will be in the positive side.

I think, it will be positive but modestly, I think, or I expect, that we'll operating in this gross margin range for now, not anything appreciably large but certainly now that I've been on the top for roughly about 90 days and after we get job 1 done in terms of getting our SEC filings done, we'll be able to devote more attention to developing programs internally to improve gross margin over time. And in over time, we'll look forward to sharing progress with you in that regard.

Two more really quick one, I apologize. If I look at the OpEx it's kind of implied in where things are shaking out, it looks like OpEx has been pretty flattish non-GAAP at about 68, 69, in that ballpark for the last couple of quarters. Is that an area you would expect to hold, in this same range or do you think as some of the facility spending and whatnot layers in that we'd expect OpEx to maybe pick up a little bit?

Well, facility spending is mostly going to be in the manufacturing arena so it will be hitting gross profit as we turn it on. But it will be at a modest pace. In terms of OpEx we're continuing to invest and hire to scale so it will have some modest up-drift as we go forward.

And the very last one. Just coming back to the cash really quick. I just want to understand the dynamics. Your gross cash as was noted, was up like $1 million but you drew like an extra incremental $9 million off the facilities, roughly. My question is, was that timing related to an extent? As you're getting rid of the old facility and bringing the new facility on? Or if not, kind of what drove that draw in the revolver?

That was just needed to -- for working capital and specifically to buy inventory. Recognize that we closed the new facility in April, which is after March, so there's no history there. That's why I wanted to preview for you that as compared to our current cash balances, don't be surprised in June that our cash balances are going to come down because of the fact that we're going to be much more prudent in terms of borrowing, and managing closer.

Okay. We should see [indiscernible] down, in other words, in June?

Yes.

Thank you. And it appears at this time we have no further questions, I'll turn the conference back over to Mr. Liang, for any additional or closing comments.

Thank you for joining us today and we'll be looking forward to finish fiscal year 2018 on a strong note. Thank you, everyone. Have a great day.

Thank you. And again, ladies and gentlemen, that does conclude the Supermicro Third Quarter Fiscal 2018 Business Update Conference Call. We do appreciate your participation. You may disconnect at this time. Thank you.