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Edited Transcript of SMCI earnings conference call or presentation 14-Feb-19 10:00pm GMT

Q2 2019 Super Micro Computer Inc Earnings Call

SAN JOSE Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Super Micro Computer Inc earnings conference call or presentation Thursday, February 14, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Liang

Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board

* Kevin S. Bauer

Super Micro Computer, Inc. - Senior VP & CFO

* Perry G. Hayes

Super Micro Computer, Inc. - SVP of IR

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Conference Call Participants

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* David Ryzhik

Susquehanna Financial Group, LLLP, Research Division - Associate

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

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Presentation

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Operator [1]

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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 2019 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 the question-and-answer session, but the entire call is opened to all participants on a listen-only basis.

As a reminder, this call is being recorded, Thursday, February 14, 2019. A replay of the call will be accessible until midnight, Thursday, February 28, 2019, by dialing 1-844-512-2921 and entering the replay pin 3700139. 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.

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Perry G. Hayes, Super Micro Computer, Inc. - SVP of IR [2]

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Good afternoon, and thank you for attending Super Micro's business update conference call for the second quarter Fiscal 2019, which ended December 31, 2018. During today's conference call Super Micro will address the company's effort to become current with its SEC filings, the business and market trends from the second fiscal quarter of 2019 as well as the company's preliminary financial results for the second quarter of fiscal 2019. 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. There was a slight delay with the posting of our 8-K on our Website which was filed earlier today. We understand the delay is due to heavy volumes at the SEC. 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 and our SEC filings. All of those documents are available from the Investor Relations page at 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 question-and-answer session with sell-side analysts.

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

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [3]

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Thank you Perry and good afternoon everyone. Let me focus the comments briefly on our second quarter performance. Our second quarter revenue will be in the range of $915 million to $925 million, which surpassed our quarterly guidance and represents approximately 9% year-over-year growth. It is our tenth consecutive quarter of year-over-year growth. Our growth momentum in key market segments continue with gain in Global 2000 enterprise accounts, Storage and accelerated computing. Computer system revenue was approximately 82% of total revenue; up 16% year-over-year driven by higher ASP per compute node. We are pleased to report continued growth of our business this quarter; most in the datacenter and the Edge despite the macroeconomic challenges.

Super Micro is well positioned to drive continued revenue growth and win market share as we beat this fiscal quarter. Our fiscal year today, total revenue, approximately 23% ahead of last year in line with our traditional growth trends. Our Global 2000 business, continues to show strong performance with 16% growth year-over-year. Our Global 2000 business utilizes our entire Super Micro portfolio encompassing compute, storage, accelerated computing, networking, managing the [hardware] and service.

Last quarter our SuperBlade business grew significantly and our Twin family grew 28% year-over-year. Substantially (inaudible). We are consistently strengthening our management [software] and service offering to provide additional (inaudible) and revenue (inaudible) to our customer (inaudible) lifecycles. (Inaudible) our resource-saving systems with the ability to delivery superior total cost of ownership, TCO, along with the (inaudible) environmental impacts were of significant interest with (inaudible) and the [private companies]. We continue to invest in our resource savings solutions including these aggregate systems and research and development of (inaudible) lifecycle enclosures, past price and other subsystems.

These technologies will help our customers save on both hardware and energy costs while reducing IP waste which lowers our total cost to the environment, TCE, in the datacenters. (Inaudible) grew 24% over the last year comprising approximately 26% of total revenue. Our (inaudible) EMEA storage service delivered industry-based performance in (inaudible) [supporting] next generation [fresh] technology such as (inaudible), Samsung from (inaudible) SSD.

Super Micro enables the software defined storage market with optimized high performance storage systems. And like other competitors who [offer] higher cost with proprietary (inaudible). We are excited to see [many] industry (inaudible) fresh technologies, hopefully in a real time-to-value advantage to their next generation workloads.

In (inaudible) and artificial intelligence, we saw strong growth, accelerated computing applications, continue to grow and that [new] possibility in total marketing, [detail] and scientific verticals. The (inaudible) additional optimized market GPU systems in (inaudible) designed to accelerated datacenter capability and (inaudible).

Super Micro new NVIDIA HGX-2 and SuperServer supports 16 NVIDIA Telsa V100 Telsa GPU's with over 80,000 [cost] delivery and (inaudible) performance of up to two (inaudible) for AI and (inaudible).

Looking ahead to new engineering developments and growth opportunities; last quarter we began seeking the upcoming future generation [Intel] (inaudible) to key customers as we began the [current] quarter. We launch 36 programs for those new scalable processors along with (inaudible) for system memory. We had received very positive initial reactions from customer [base] and we anticipated the upcoming server (inaudible) lifecycle, we are prepared for the revenue growth which will [migrate] in the coming quarters.

As the market moves to 5G, Super Micro is uniquely positioned to address solutions from the (inaudible) to the Cloud. We extended our selection of compact IoT server solutions to address a wider range of verticals including networking, communications, security and industry automation. Our (inaudible) network (inaudible) support up to 36 network ports and is built for network function (inaudible). And if we (inaudible) networking SDN. (inaudible) CPU have and (inaudible) as well (inaudible) AI and (inaudible) the computing to [5GH] infrastructure.

In summary, we achieved an important milestone this year delivering 10% worldwide systems and subsystem (inaudible) according to industry reporting. We will continue go [gain] next year with our resource saving technology to save customers hardware [acquisition] costs while improving their overall PCO and PCE. With our U.S. headquarters and the manufacturing and global scale, we are uniquely positioned to bring optimized design and [competitive value] to the faster growing and (inaudible) the market verticals such as Cloud, AI and 5G.

We are also (inaudible) on hardware technology [transition] for both compute; a new second generation Intel scalable process and storage including anyone (inaudible). Then we have, again, new large scale [system with] (inaudible). This [moment] we're preparing Super Micro to (inaudible) growth of its market share in 2019.

And now I will hand the section over to Kevin.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [4]

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Thank you Charles. First I will address the current health of the business by providing an overview of our financial performance for the second quarter of 2019. I will then make a few comments about our progress on our SEC filings. As Charles mentioned earlier, we estimate our fiscal second quarter revenue within the range of $915 million to $925 million. With that result, we have exceeded our revenue guidance range over my tenure for the past three quarters.

Our customers continue to grow their business with us and drive digital transformation using Super Micro's Cloud and Edge portfolios. On a year-over-year basis, you may have enjoyed the highest growth at approximately 28% powered by the U.S. which grew approximately 11%, offset by a decline in Asia-Pac of approximately 11%. Other regions grew approximately 23%.

Our estimated range of gross margin on both a GAAP and non-GAAP basis was from 13.9% to 14.1%. Our margin benefited from improved customer mix; partially due to lower sales to Asia and a lower provision for excess and obsolete inventory. Operating expenses were higher this quarter related to product development materials, employee bonuses, audit fees and a provision for a bad debt.

We estimate non-GAAP diluted earnings per share this quarter within the range of $0.57 to $0.61. We continue to generate cash and estimate cash generated from operations was approximately $42 million. After deducting capex of $4 million, we estimate free cash flow of approximately $38 million for the quarter. On a cumulative basis over the last three quarters, we estimate free cash flow was approximately $114 million that has allowed us to pay down our loans and reach a positive cash position.

This quarter our cash conversation cycle increased to 96 days from 92 days in the prior quarter. Day sales outstanding decreased slightly while inventory days increased. Our near-term target remains from 85 days to 90 days. We are guiding sales for the third quarter in the range of $800 million to $860 million. We are now seeing normal business trends and have received some sizable business [re-tools] at existing customers. We believe we are back to business as usual.

Now, let's turn to progress we are making on our Fiscal 2017 10-K. If you recall, we concluded last quarter that receiving prior periods was necessary as we announced in our current report on Form 8-K filed November 15, 2018. Since then, we have worked diligently and the company has achieved a significant milestone in this process. We delivered a draft of the Fiscal 2017 10-K with restarted financial statements for 2015 and 2016 to our independent auditors in late January. They're reviewing the draft 10-K and are working to complete their integrated audit. As a result of our conclusions, our independent auditors continue to perform more testing of our accounting analyses and internal controls assessment. We are working closely each day with our independent auditors to complete the remaining audit procedures.

Our internal audit team is developing a prioritized remediation roadmap to address the material weaknesses from our internal controls assessment. We continue our procedures on Fiscal 2018 financials in parallel and are making solid progress.

So to close, we remain laser focused on resolving our SEC filings. We continue to build industry leading technology solutions for a data hungry world. We're excited for the rest of 2019 and beyond.

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Perry G. Hayes, Super Micro Computer, Inc. - SVP of IR [5]

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As indicated previously, we will have a Q&A session with sell-side analysts will be permitted to ask questions. I would like to remind you that your questions should be directed to the business update that we have just provided. We may decline ans -- to answer questions relating to the audit committee investigation or the delayed filing of our 10-K because of pending litigations.

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

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Questions and Answers

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Operator [1]

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Thank you. Thank you sir. Ladies and gentlemen, our question and answer session will be conducted electronically. (Operator Instructions) And we'll first go to Mehdi Hosseini with Susquehanna Financial Group.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [2]

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Thanks so much. This is David Ryzhik for Mehdi. Just a few, if I could. Charles, maybe -- would you be able to give us an update on the macro environment demand across regions and what you're seeing in the current quarter and maybe you can talk about what drove the EMEA strength and I had a few follow-up's.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [3]

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Yeah, thank you for the question. Yes, we observed macroeconomic a little bit choppy and believe (inaudible) weaker than last year. However, our new quarter has been very, very strong; (inaudible) and Storage and other platforms. So we believe this year, [March] 2019, (inaudible) [growing] year in terms of market share and we are carefully observing that change. The memory price drop that -- everything under careful control from Super Micro's point of view.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [4]

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And one of the larger enterprise storage vendors on its earnings call yesterday had noted some weakness with large enterprise companies in the U.S.; elongated purchasing decisions, more scrutiny around buying systems. Have you seen this as well? I was just curious.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [5]

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Yeah, from our point of view, I mean March quarter had been very (inaudible) [soft] quarter to us in history but this year we -- so far, so good. We feel a [chance] is still pretty positive to us.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [6]

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And on the last update call in November, you had noted that you were beginning to see some demand return from customers that initially paused after the Bloomberg article. Has this continued, have you seen an improvement from customers that initially had made a pause?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [7]

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Yes, we can see that improvement and the (inaudible) normal and positive from our [current view.]

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [8]

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Great. And then just on Cascade Lake, just wondering what your expectations are, I guess, from a calendar year 2019 perspective. When does this start ramping for Super Micro from a revenue perspective and you made some interesting comments around Optane DC Persistent Memory. I would love your opinion on how material this could be in this cycle or do you think that it really ramps in subsequent server cycles? Thank you.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [9]

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Yeah, thank you. We believe Cascade Lake will be a big change for Super Micro. Although we [have started] shipping a sample (inaudible) with DC interest from the customer side because of beta performance and [as to our] DC Persistent Memory, (inaudible) each market and we need to have some customer interest for those applications. Kind of not [beta based] and kind of big data kind of application. (Inaudible), interest in that area.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [10]

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And what drove the high ASP per compute node?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [11]

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You know (inaudible) by our [completed] solution including all of the hardware and some (inaudible). So because higher percentage of -- much higher percentage of computer system (inaudible) data of (inaudible). That's why our ASP will continue to grow. And also more people move to fresh, especially (inaudible) and that also grows our ASP and this trend will continue for 2019 at the least.

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Operator [12]

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Our next question comes from Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [13]

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Yes, thank you and congrats on the strong results, strong guidance. The split between systems and components, did you give that? If not, can you?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [14]

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We did not but just a second here. Systems were --

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Perry G. Hayes, Super Micro Computer, Inc. - SVP of IR [15]

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Eighty-two.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [16]

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Yeah, 82%.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [17]

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Eight-two percent, okay. Great. And just to be clear, where you saying that this guidance reflects normal seasonality or not?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [18]

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Well it's certainly -- it's normal seasonality but as we had said last quarter, you know, we are cognizant of the macros that are out there. And so therefore we've tried to factor that into our thinking. We also know that customers are trying to determine if they go for the next technology (inaudible) cycle or not so that could pause their decisions a little bit.

And then lastly, you know, certainly there are some components that are declining in value and customers time -- their purchases sometimes around that. So those are kind of the themes that we saw.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [19]

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Yeah, talking about Intel, new CPU (inaudible). I believe most (inaudible) about April timeframe.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [20]

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Okay, can I -- and then historically, Super Micro has had four to six quarters of 20%-plus year-over-year growth. You guys just did that just from I think the beginning of 2017 to September of 2018. And then you have sub-20% year-over-year growth and it looks like we're looking at two quarters of that being the case. It all averages out to 20% -- to a 20% CAGR over, you know, what the past 12 years, which is incredible. But, why shouldn't we believe we're at the beginning of a digestion period at this point here?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [21]

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Yeah, again, this quarter I mean, in the March quarter, I guess there are two major impacts. One is memory price and fresh EMEA price drop (inaudible) lower ASP a little bit and also macroeconomic (inaudible) and (inaudible) Cascade (inaudible) until April or May and we try to be conservative of this quarter, March quarter.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [22]

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Okay. All right, and then it looks like a non-GAAP opex was up about $6 million, Q2, you did cite some expenses Kevin, I'm not too sure if that was included in non-GAAP opex or not, but can you just give a little bit more color around that Q2 uptick?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [23]

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Yeah, so I had mentioned, you know, on the call that there were expenses related to certainly our engineers, you know, developing first products for Cascade Lake and so that was one element of them pulling materials for that. I mentioned that we had employee bonus this year and we -- this quarter rather and we did have something unusual for the company and that we did have a reserve for credit loss which doesn't happen very often.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [24]

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And what was the reason for the credit loss?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [25]

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Just a customer having problems.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [26]

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Gotcha. Okay. And thoughts on this opex will trend and also (inaudible) for the March quarter?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [27]

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Yeah, so certainly the ghost margin for this quarter was quite an uptick as compared to what we've had historically. Most recently, as you remember, I called it out that we had customer mix that went into our favor as well as we did have a pretty good excess inventory quarter. I'm not sure the [ENO] is going to repeat over the course of time but, if you remember, that what I said is that we would be trying to work on gross margin at a modest pace over time. So this quarter we certainly had a good one but in the trend we're trying to improve modestly over roughly about that 13.5% that we've been at for a period of time.

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Operator [28]

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Our next -- (Operator Instructions)

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [29]

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Operator, I think there's one more question in the queue.

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Operator [30]

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Yes, we'll take our follow-up question from Mehdi Hosseini with Susquehanna Financial Group.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [31]

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Hi thanks, David Ryzhik again for Mehdi. Thanks for the follow-up. Kevin, you didn't note lower memory pricing as a reason for the strengthening gross margins. What was -- was memory a benefit to gross margins in the quarter?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [32]

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I think --

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [33]

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Or did you --

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [34]

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By and large -- as I said earlier, it's really customer mix. Since I've gotten here, we've done a little bit more in terms of looking at our gross margin mix by customer and the -- and our portfolio. So we want to be cognizant of the fact of where we have margins for customers kind of like in a banding way and so that allows us, from time to time, when we want to bid to win business, we do it in the context of the entire portfolio and so I think it's just really looking at our customer mix a little bit more sharply. Not necessarily a significant impact from memory in the December quarter.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [35]

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And any reason for the tick-up in inventory days?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [36]

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Yeah, we made some purchases at quarter end that we thought were advantageous.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [37]

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Great, and I was just curious on the storage and overall storage I believe I heard 20% growth year-over-year. Any sense on maybe the breakout within that of traditional versus next gen?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [38]

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I guess both with traditional and next generation [we are also growing], (inaudible) next generation, especially SSD EMEA-[based], we believe will be a much higher (inaudible) to grow.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [39]

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Yeah, and actually traditional came down a little bit and next gen grew handsomely.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [40]

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Okay, great. Any color around what drove that, the growth in next gen?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [41]

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Next gen, as you know, we had a fourth company to deliver the order in form factor, memory to the market, (inaudible) from Intel, (inaudible) Samsung and (inaudible) market leader and that kind of gives the customer a very good response.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [42]

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I think in addition to that, we've been talking about G2000 customers and as we have now lapped a year, some of those G2000 customers have -- you know, we have an appreciably stronger business with them then we did 12 months ago.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [43]

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Great. And what percentage of overall revenue is G2 is -- I think in the past you've maybe called it enterprise but what percent of revenue is that driving?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [44]

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Yeah, we're probably not going to break that out right now.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [45]

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Okay, okay. And then last one, IDC, what percentage of overall revenue was that and have you seen any wins with new customers in the IDC space?

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Perry G. Hayes, Super Micro Computer, Inc. - SVP of IR [46]

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David, this is Perry, so just so you know, the [G2K] that we talk about is a combination of both the IDC group that we used to talk about and it also includes enterprise group that we're now talking about. So they're together in what Kevin's already provided.

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Operator [47]

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And it appears at this time we have no further questions. I'd like to turn the call back to Mr. Liang for any additional or closing comments.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [48]

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

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Operator [49]

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Thank you ladies and gentlemen, that does conclude the Super Micro Second Quarter Fiscal 2019 Business Update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.