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Edited Transcript of SMCI earnings conference call or presentation 15-Aug-19 9:00pm GMT

Q4 2019 Super Micro Computer Inc Earnings Call

SAN JOSE Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Super Micro Computer Inc earnings conference call or presentation Thursday, August 15, 2019 at 9:00:00pm 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. - Former SVP of IR

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Conference Call Participants

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* David Ryzhik

Susquehanna Financial Group, LLLP, Research Division - Associate

* Jonathan Doherty Lopez

The Vertical Trading Group, LLC, Research Division - Research Analyst

* 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. Thank you for standing by. Welcome to the Super Micro Computer Inc. fourth quarter fiscal 2019 business update conference call. The company's news releases published issued earlier today are available from its website at www.supermicro.com. (Operator Instructions) 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, Thursday, August 15, 2019. A replay of the call will be accessible until midnight, Thursday, August 29, 2019, by dialing 1 (844) 512-2921 and entering replay pin 5585132. International callers should dial 1 (412) 317-6671. With us today are Charles Liang, Chairman and Executive -- 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. - Former SVP of IR [2]

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Good afternoon, and thank you for attending Super Micro's business update conference call for the fourth quarter fiscal 2019, which ended June 30, 2019. During today's conference call, Super Micro will address the company's preliminary financial results for the fourth quarter of fiscal 2019 and the company's effort to become more current with its remaining SEC filing.

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 and 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 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.

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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. Our first quarter revenue would be in the range of $825 million to $835 million, which exceeds the midpoint of our quarterly guidance of $800 million. It is 15% lower than last year and 11% higher than last quarter. For our fiscal year revenue was up approximately $3.5 billion and represent an increase of approximately 4% from last year. Non-GAAP earnings per share was in the range of $0.57 to $0.61 compared with a range of $0.75 to $0.79 last year and a range of $0.48 to $0.52 last quarter. System revenue was approximately 81% of total revenue. System ASP was a bit lower year-over-year mostly due to lower DRAM and then price, which impact revenue. We launched comprehensive portfolio of over 100 DIMM server and storage system, supporting the new Intel second-generation Xeon scalable processors code named Cascade Lake. The new product win was record performance and efficiency improvement to enterprise, cloud, 5G and AI workload with up to 50% better TCO. We have seen strong interest in these new products and [advance over our] new product that outpace previous [generation]. It was a challenging period following a traditional strong quarter. Volatile market conditions well documents trade tension and some key component price reduction impact our quarterly revenues. However, the trade challenge, including tariff impact, were minimized by our strong U.S.-based manufacturing presence and our distributed global manufacturing footprint in the U.S.A., Taiwan and in Netherlands. We also see positive signs with our key product lines such as BigTwin and SuperBlade, which achieved higher sales on both quarterly and yearly basis.

Importantly, we see great opportunities as our long-term investment in operation and improved internal efficiency and [resources]. And a growth of our key product lines assume the market demand for application optimized high-performance driven products have not declined.

On the product side, we remain focused on delivering solutions based on our new resource saving architecture. With Super Micro's unique architecture, this aggregates measure major subsystems, separating compute, storage, I/O, power and cooling. Each of these though can be [differentiated] or upgrade independently, allowing data centers to reduce different cycle cost and their impact to the environment by reducing power consumption and [waste]. Some components, such as [longevity power supply,] encourage us then IoT devices can remain in [operation] for up to 12 years. Further saving achieved through [shared] power and cooling as well as free air cooling solutions. On a typical 3 to 4-year refresh cycle, Super Micro resource saving bandwidth deliver up to 30% [minimum] hardware cost of bandwidth from each refresh cycle. We continue to deliver [first-to-market] products, introducing a [first to] server and storage system that support all-flash EDSFF storage drive. This optimized NVMe drive deliver up to 6x more throughput and up to 5x latency reduction over traditional flash storage, which is ideal for the high-performing workload for application, requiring higher [AIs] such as autonomous driving, search engine, mission-critical database, artificial intelligence, HPC, scientific research and more. We believe EDSFF will become a main [common] storage form factor in the near future.

For 5G, Super Micro is committed to providing the most advanced solution for age, the modern micro data center and core networks that provide the security, IoT, multiple access edge computing. And open radio access network. The need for powerful server across a wide variety of implementation will only increase (inaudible) continue to grow out on 5G network. Super Micro H server aims to transform enterprise and they empower them with intelligent connectivity from IoT device to cloud. AI from H is also made possible as we provide, optimize and validated NVIDIA, CPU collaborating and EGX platform edge computing solution to our customers. Saving the best for last, let me have a brief review of our blending architectures with many innovations for high-speed connectivity design. This new product line (inaudible) connectivity [bandwidth] and computing power and computing [intensity]. Two of these new X86 projects are called [Hypo Rock Man] and (inaudible) service. The early availability is target of early Q1 2020. In summary, we see tremendous potential opportunities in our enterprise, cloud, 5G and AI. There we're benefited from Super Micro's resource saving solution. I'm very confident in the strength of our product portfolio and continue improvement of our operating fundamentals. Regarding the (inaudible) market cycle, our business model of first-to-market design that delivers breakthrough innovation in performance, efficiency and TCO [we have] achieved some [success]. Moreover, we will conveniently invest more effort in our strategic relationships to build a stronger presence in key markets and target the vertical customers. I expect this action will result in continued market share growth and improvement of our financial performance.

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 fourth 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 fourth quarter revenue was within the range of $825 million to $835 million. Our geographies were lower on a year-over-year basis with EMEA approximately 14% lower, Asia, 19% lower and the U.S. 14% lower. Our estimated range of gross margin on both a GAAP and non-GAAP basis was from 14.7% to 14.9%.

Our margin has steadily improved since last year and have benefited from improved customer mix, product mix and better component pricing. Operating expenses were slightly lower this quarter due to lower reserves for bad debt, offset by higher sales and marketing expense. We estimate non-GAAP diluted earnings per share range this quarter was within the range of $0.57 to $0.61 per share. We continue to generate cash and estimate cash generated from operations was approximately $81 million. After deducting CapEx of $11 million, we estimate free cash flow of approximately $70 million for the quarter. On a cumulative basis over the last 4 quarters, we estimate free cash flow was approximately $259 million. This quarter, our cash conversion cycle decreased to 91 days. The decrease was primarily due to a 21-day decrease in inventory days to 92 days. Actual inventory on a dollar basis declined sequentially. Our cash conversion cycle target remains 85 to 90 days.

Now let me comment on our progress on our remaining delinquent SEC filings. We recently completed our work on the fiscal 2018 financials and have submitted them for audit. We are now working on fiscal 2019 inclusive of the efforts, finalize revenue under both the 605 and 606 revenue recognition standard. And we will be under a 2-year engagement with our auditors for both fiscal years 2018 and 2019 that will enable some efficiency. The team remains focused on becoming fully current on our SEC filings.

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

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As indicated previously, we will have a Q&A session where sell side analysts will be permitted to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Mehdi Hosseini from Susquehanna Financial Group.

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

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David Ryzhik for Mehdi. Just a quick question on gross margins. I believe they were down from the prior quarter, I guess, from around 15.5% to 14.7% to 14.9%. Just wondering what the dynamics were over there? Obviously, revenue ticked up, components' prices probably ticked down. So just wondering, what was driving the decline? And then I had a follow-up.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [3]

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Sure. No problem. This is Kevin. Last quarter, when we highlighted the fact that we were in the mid-15s, we cautioned the group that we -- it looked like we had a very good quarter in terms of everything aligning up perfectly. And as we talked to this same question last quarter, we highlighted the fact that we were in the mid-13s not too long ago, had broached 14% towards the midyear of 2019. And we're in between 14% and 15%, and so, we highlighted that as being some steady progress as we went through the quarters. So we highlighted that, that last quarter, things lined up very, very well. So I don't necessarily think it's decline. I think that our continued progress and it's not perfectly linear.

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

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And perhaps maybe you can talk about the overall server pricing environment and maybe provide an overview of just demand trends that you're seeing in the current quarter and what your outlook is moving forward? I'd appreciate that. And then I had a follow-up.

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

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Yes. I mean, as you know, the [market is be choppy] and macroeconomic (inaudible). However, our solution outperform others, especially with Cascade Lake. There is a product line that's available. So we expect our business will continue improving. Although, maybe not very fast, but [actually still] improving. And especially, and the new technology will be positive sign for our business.

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [6]

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Yes. This is Kevin. I think if we put our lens a little bit shorter in time, as we looked at this quarter's guidance, certainly, we are observing and are part of the macro situation that many of our competitors have already voiced out. Usually, this quarter is seasonally down. And when the macro conditions are like this, sometimes, visibility is poor. And so, we have those 3 elements that were in our mind as we set guidance for this next quarter.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [7]

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Got it. And then just last one, would love to get an update on where you are in your enterprise efforts? This is something you've mentioned in past as far as building out the enterprise efforts, services, software, maybe Fortune 500 accounts? Just would love an update there, maybe new customer account figures, anything there would be helpful.

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Perry G. Hayes, Super Micro Computer, Inc. - Former SVP of IR [8]

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Yes, this is Perry. So our [GQK] portion of our business which includes that enterprise section, was approximately 20 -- a little bit better than 20% of the overall revenue. Within that, the enterprise section was actually up year-over-year by about 12%. So we are making steady progress in there with a number of customers that we have and the business that we're doing.

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Operator [9]

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We'll take our next question from Nehal Chokshi from Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [10]

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And congrats on what I think is a fiscal year that represents records on cash from operations and non-GAAP net income. So you now have a $36 million net cash position, that's 29% of your market cap rate, and based I think on your trailing 12-month midpoint EPS that you provided for the past 12 months, it looks like you're trading at 5x [EBIT] net income. So are you guys willing to put that net cash to work in terms of buyback once you are able to, i.e., once the 10-Ks are indeed up to date?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [11]

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Yes. I think if you look at the cash that we have now, certainly, we have harvested some of that from the balance sheet. I think roughly, out of that $259 million working capital, harvesting roughly about $70 million of that. And we know that they're going to need that soon we continue to grow again. So I know this is a question that came up last time. We are just going to continue to plow forward in terms of understanding what our working capital needs are as growth returns. We feel pretty strongly about that.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [12]

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Okay. And then -- that's great that you submitted the fiscal year '18 financials for finalization by your auditors. Can you confirm that the submitted financials are within the previously announced revenue and EPS ranges?

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Kevin S. Bauer, Super Micro Computer, Inc. - Senior VP & CFO [13]

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Yes. No, I'm not going to be able to confirm that. That's not something to address at this moment.

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Operator [14]

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(Operator Instructions) Our next question comes from Jon Lopez of Vertical Group.

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Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [15]

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I just had a couple of clarifications. First, did you guys give us -- or would you give us the number -- the server system number, please? Or the percentage of the business that was server systems?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [16]

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Yes, we said in the script, in Charles' script, that 81% was services -- I'm sorry, servers.

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Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [17]

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81%. Okay. 81%. I'm sorry, I missed that. My second question, we don't really have all the moving pieces I guess, but it looks like OpEx was kind of flattish sequentially. A, I'm wondering if can you confirm that? And then, B, just any thoughts on how that ought to trend? Obviously you guys know that the environment's not terrific right now, so I'm wondering if you guys are doing anything proactive for the balance of the year on the OpEx side.

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

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So it was relatively flattish. We talked about the 2 components that wiggled. I think, as we look forward, we will -- we have confidence in a long-term business (inaudible) to investment. I don't think that [we'll see] large increases in OpEx so far in line with what we think needs to be investment for the future.

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Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [19]

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Got you. Okay. Helpful. I was -- this applies to one of the comments you guys made I apologize I can't remember who made it but some version of the Cascade Lake pacing is ahead of prior generations. I'm wondering if you could just flush that out a little bit. Maybe not entirely consistent with what we're picking up elsewhere. So I'm wondering if it's specific to your mix, your SKUs. So if you guys just could spend a second on that? And then, in doing so, I know you're not going to give guidance so I'm not asking for it, but as you think about trending towards the end of the calendar year, any thoughts on just seasonality and how applicable that may be given the environment and given what you're seeing with the Cascade Lake based projects?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [20]

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I mean as you know, we are technology DB company [so when there are] new technology, we had a chance to grow data. Given the macroeconomic [wherewithals, it will be] choppy in the coming months. So we try to be conservative. However, our Cascade Lake, I think (inaudible) very well, especially the new platforms including BigTwin, there have been continue growing and (inaudible) we start resource saving, they started to gain more and more attraction. And like I just mentioned, the recent results launched another 2 new data forms including (inaudible) and hyper (inaudible). So although it's in early stage, now we believe in (inaudible) and those new technology. We have (inaudible) growth (inaudible).

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Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [21]

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And if I could just follow up on that. You make a good point, which is, you guys have put a lot of SKUs out around Cascade Lake. It appears as though significantly more on a relative basis than your peers have. And so I'm wondering do you -- would you view Cascade Lake as perhaps an opportunity for maybe like disproportionate share gain with this cycle? Like i.e., are your competitors perhaps less focused on this, excuse me, on this iteration of -- or this portion of the Intel platform than you guys are?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [22]

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Yes. As you know, there are lots of technology [kind of just] available including I just mentioned EDSFF and Samsung [NA1], those product line continue to gain market share. Although they are pretty new technologies, but we see a big [credential] in near term, either late this year or early next year is where the big change would be. And as to Cascade Lake, we see us be a big room to grow.

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Operator [23]

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Our next question comes from Mehdi Hosseini of Susquehanna Financial Group.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [24]

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David Ryzhik for Mehdi again. Just back to gross margins, I guess, moving forward with lower component prices, should we expect that to serve as a tailwind to gross margins moving forward?

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

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Well, I think the reduction in component prices obviously have slowed down. So we've gone through a pretty steep ramp as we went through the last few quarters. We're not going to have that same kind of ramp on a go-forward basis. So I think in terms of it helping us as one of the components in terms of improving our gross margin, I don't see that, that's going to be a sustained uplift because those prices are -- the reduction in those prices is flattening out.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [26]

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Has that altered your decision-making around inventory management as far as memory? Are you strategically adding components given the flattening out?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [27]

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I would have to say, we have been [conservative] in this DRAM and then price drop period. So we will continue to monitor very closely.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [28]

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Great. And then just question on storage, would you be able to share the growth in NexGen storage versus traditional storage and overall storage?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [29]

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Yes. Indeed, especially our new storage form factor NF1, is basically our EDSFF. We have [plenty] of a new platform, and we have (inaudible) of our endorsed [probably] in near future and midterm.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [30]

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And just lastly, Charles, would love to get your take on what you're seeing in hyper scale or Internet data center? I know that's part of the G 2000. But would love to hear what trends you're seeing amongst your customers there?

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [31]

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Not (inaudible), what we share with you, we continue to grow our economical scale in Taiwan and also in U.S.A. So when our scale continue to grow, we will be more competitive to beat those larger scale data centers, and we are prepared [enough].

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Operator [32]

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Our next question coming from Nehal Chokshi of Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [33]

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So I think you stated that you expected to have gained market share during the quarter. So what do you think the market [uptake there] because Intel data center group revenue was down 10% year-over-year about but their enterprise and government was down 31% year-over-year and you just said that you guys were up 12% year-over-year on the enterprise side. So just maybe give us a sense as far as what do you think the market did? And what portions of that Intel data center group metric or probably actually most relevant for gauging Super Micro performance?

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Perry G. Hayes, Super Micro Computer, Inc. - Former SVP of IR [34]

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Nehal, it's -- we don't always track out 1-to-1 with what their group does. Again, if you look at what they are tracking to and [want it to be] hyper scale, et cetera. And what that -- that's not a major part of our business although we have some customers there. The enterprise would be a separate sort of group there.

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Charles Liang, Super Micro Computer, Inc. - Founder, President, CEO & Chairman of the Board [35]

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But I would just say, overall, I mean, we sell economical scale continue to grow we will be more aggressive in both enterprise and super scale data center.

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Operator [36]

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It appears at this time that we have no further questions. I'd like to turn the call back over 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 [37]

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

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Operator [38]

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Thank you, ladies and gentlemen. That does conclude the Super Micro fourth quarter fiscal 2019 business update conference call. We do appreciate your participation. You may disconnect at this time. Thank you.