Ladies and gentlemen, thank you for standing by, and welcome to the Supermicro Fourth Quarter Fiscal 2020 Financial Results. [Operator Instructions]. I would now like to hand the conference over to your speaker today, James Kisner, Vice President, Investor Relations. Thank you. Please go ahead.

Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the fourth quarter of fiscal 2020, which ended June 30, 2020. 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. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the Events and Presentations tab. We have also published management scripted commentary on our website. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. There are a number of risk factors that could cause Supermicro'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 2019, our March 2020 10-Q and our other SEC filings. All of these documents are available on the Investor Relations page of Supermicro'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 business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we'll have a Q&A session for sell-side analysts to ask questions. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Thank you, James, and good afternoon, everyone. Today, we have released our fiscal fourth quarter and full year fiscal 2020 financial results. Now let's take a look at some highlights from the quarter. Our fiscal fourth quarter net sales totaled $896 million, up 5% year-over-year and 16% sequentially. Our fiscal Q4 earnings per share was $0.68. We saw double-digit growth in Edge applications and some key data center and cloud customers. This was offset by softness from some customers who are seeing the worst effect of the COVID-19 threat. Before we dive into the financial details, I want to provide you an update on our business strategy. Last quarter, we talked about our 4 strategic high-growth market segments, and we are aligning our resource accordingly to speed up our growth for the coming quarter and years. These 4 strategic market are: first, organic enterprise and channel business, including server, storage, IoT and AI, which are our historical growth areas; second, our new 5G, Edge and Telco business; third, our new large data center and public cloud; and fourth, software and global service. I'm pleased to share that we have made good progress in 3 of these 4 market categories this quarter. The strategy enable us to win more high-profile customers among enterprise, data center and 5G, Telco infrastructure builders. In addition, we have continued our investment and growth trend in software and service by doubling this team's head count over the past year to prepare a series of higher-value product line. Unfortunately, COVID-19 pose significant disruption on our organic enterprise and channel business and slowed their growth in the near term. But we are encouraged by our progress in our 2 new strategic drivers this quarter, the large DC and cloud as well as 5G and Telco. And they prove…

Thank you, Charles. First, I'd like to thank our employees, customers, investors and partners for their support as we navigate the ongoing challenges of the COVID-19 pandemic. Before jumping into the details of the quarter, we'd like to provide a brief update on the status of our operations. Recall, our largest production and employee presence is in San Jose, California. We continue to operate under increased safety measures for the health of our employees. While we have adapted well to current conditions, we continue to maintain a higher level of inventory and are adjusting our logistics to moderate costs. All that said, while we aren't satisfied with our operating profitability this quarter, we are proud of our results under these unprecedented times. While we don't have unique insight into the long-term trajectory of a global economic recovery from COVID-19, we believe that much of the effects we are seeing on our financials today and over the near term will likely prove transitory. Now let me turn to the details of the quarter. Our fiscal fourth quarter revenue totaled $896 million. This reflects a 16% quarter-on-quarter increase from the third quarter of fiscal 2020 and a 5% increase from the same quarter of last year. Systems comprised 83% of total revenue and volumes of systems and nodes shipped were up sequentially and year-over-year. System ASPs increased quarter-on-quarter but declined year-over-year. Turning to geographic performance. On a year-on-year basis, the U.S. was up 4%, EMEA grew 13% and Asia was flat. On a sequential basis, U.S. sales grew 27% as we saw strength at a number of Internet data center and enterprise customers. EMEA grew 3% and Asia grew 2% sequentially. Before moving down the P&L, I'd like to point out a number of discrete items worth noting for investors. First, we…

Thank you, Kevin. Operator, we're now ready to open the queue for questions.

[Operator Instructions]. And your first question comes from the line of Aaron Rakers from Wells Fargo.

Yes. Maybe the first question, if you can just talk a little bit about the demand environment. There's been a lot of discussion out there about kind of the cloud, the Internet data center, large data center customers going through some level of a digestion phase. So I'm curious what your insight is in terms of the demand profile there that you're seeing into the current quarter and whether or not you have any kind of indicators of a digestion phase materializing and any extent in terms of how material that might be or how long that could last?

Yes. Very good question. We did see a large data center, especially those social networking, those streaming even gaming large data center have a strong demand during this COVID-19 period, especially. And we have most focus on the other side, enterprise channel. So that kind of increased demand, indeed, that did not help us a lot in June. But likewise, say now, we are extending our operation and business to Taiwan. Hopefully, our cost will decrease. So we will be able to more aggressively participate in those large data center and cloud. And I believe this business may not be seen for another few quarters probably.

Yes. Aaron, I can augment that describing a little bit of what we're seeing in the current quarter. So I think evidence that would align with what you're hearing from other parties is that as we entered into July, we definitely saw that our customers were taking a pause after having a strong June. And so I think as opposed to last quarter's comments, where I said we started off strong, and let's see where we go; this quarter, we're seeing a pause in July, yet just currently now, we're starting to see an order -- a flow -- an order flow pickup. So we hope that, that is a good turn to our July results. So a little bit different topology as compared to last quarter.

Okay. That's helpful. And then you talked a little bit, I think in your prepared remarks, about kind of "significant component cost headwinds", but it sounds like those might be abating here as we move into this current quarter. Can you help us understand or appreciate how you're kind of seeing component cost trends into this current quarter and kind of how much of that 70 to 100 basis point improvement in gross margin might be assumed from component cost dynamics?

Sure. I think what we're seeing is that you got a little bit heated with component costs, and things are moderating a little bit. For us, Aaron, it takes time for us to kind of digest inventories that we have on hand. And we believe that towards the end of the quarter, we'll be able to see some moderation in component costs. I think that's a fair portion of what we described in terms of our expectations for Xeon improvement. Other things that we continue to battle are the momentary high cost of logistics and freight. As we kind of mentioned earlier, it was tough in the last quarter. It kind of loosened up in June. It was looser in July and seems to be tightening up a little bit. But beyond that, what we've done is we've looked at some of our components that we bring from Asia to look at what are those that we can start shipping by sea. It might take a little bit more in terms of inventory holding, but it's definitely worth it when it comes to some components like motherboards and those kind of things, we can afford to do by sea. So we're kind of managing that. And hopefully, we'll have some improvement in that arena as well.

Okay. Very helpful. And then a final quick question. There's a lot of discussion out there about Intel timing, and I know it might be longer term in nature around the cadence of their product cycles. But any thoughts that you guys might offer in terms of how the cadence of Intel's moves product-cycle-wise, 10-nanometer, 7-nanometer affects your kind of outlook and appreciating that's probably a longer-term question.

Yes. I mean, Intel, as you know, they postponed their 10-nanometer and also the coming 7-nanometer technology. So that did impact some to us. However, we also grow AMD product line very aggressively. So overall, there are some impact for our maybe September quarter. But long term, we should be able to adjust efficiently.

Yes. Aaron, that's -- that's one of the considerations as we look forward when I said that product development costs may increase a little bit is that now we have to think about multiple platforms, given the dynamics of Intel's timing and pushing the pedal to the middle a little bit more on alternate processors.

Your next question comes from the line of Ananda Baruah from Loop Capital.

A few, if I could, Charles and Kevin. Kevin, to start, just a point of clarification. When you were talking about sort of seeing a pause in July after June and now seeing order flow pick up, was that your enterprise and channel business? Or was that the hyperscale public cloud business?

I think it's -- we're seeing it on multiple fronts, so not necessarily the hyperscale, but probably more traditional.

Okay. Okay. Great. Got it. So you're starting to see a pickup again. And I was going to ask you about the linearity of slowing, but it sounds like it was really a month of July dynamic. Are you -- do you -- any context that you can provide for how we should think about like seasonality into December? I know it's probably lack of visibility, a little murky right now. But any context just for a modeling would probably be useful for us.

Yes. That's a little bit hard to call right now. I believe that we all are hoping that things return to normal a little bit and that we have some seasonality certainly in December and maybe a little bit better than normal. I don't know, Charles, do you have anything to augment that?

Yes. I mean September traditionally our soft quarter. And December, we had 20% higher than September in the history. So this year, I believe we will have some impact like that, although coronavirus impacting us, but we are doing what's possible to adjust our workload. We will feel December will be a much stronger quarter, yes. That will be still the case.

Really helpful. And I guess just with regards to the cost, sort of the cost optimizing, and you highlighted shift to -- kind of production shift to Taiwan. You guys -- you also mentioned accelerating your online business. Could you just walk us through the different initiatives that will help optimize the cost base? And then maybe give us some sense of timing of how sort of you might begin to be able to benefit from those optimization efforts?

Yes. I mean, since about 9 months ago or even 12 months ago, we started to grow in Taiwan aggressively, including engineering, the operation and even sales, even customer service. So that transition will be up now, especially for coronavirus. As you may know, the coronavirus impact in Taiwan is much less than United States. So we are moving to Taiwan for cost reason and for coronavirus impact reason as well. And the result is gradually helping us. And I would like to say that December quarter, it will have more next year, for sure, will be much more efficient. And it's kind of mid-term and long-term investment, but December quarter, we will see some help. As to our online business, it's basically a complementary business to help our customers to get support, especially spare parts or when they need a mobile system, they can order from online. And that system we have been preparing for many years. And now it is getting very mature. So we start to small-scale business last few quarters. And then we will have a formal official release very soon.

That's really helpful, Charles. I really appreciate that. Let me just sneak one more in here. Just -- this is on 5G, your 5G initiatives. And then you had made mentioned a couple of times on the call about seeing public cloud progress. Could you just give us -- put some context around what's going on right now, what you're seeing and experiencing in your 5G and public cloud initiatives? And appreciating that, Kevin, you said that it's been sort of stop, start -- sort of stop, start again. But would love to get a sense of contextually what you guys see going on, the progress that you've made. And then do you think these can be, I don't know, have an impact in the December quarter if things come together for you?

Good. Thank you for the question. Yes, we start to focus on 5G, Telco about 12 months ago. And now we already engaged a handful of good-sized customers. And they are very happy, very convinced with our product. So we see some production, some volume moving since last quarter. And those volumes will ramp up in this quarter and December quarter and especially for next year. And with our operation, growing in Taiwan aggressively now, we soon will be able to ship really high-volume product from Taiwan operations. And that's why it's the time, it's mature for us to start service large-sized cloud and data center. And we already are working with a couple of those potential customers. And the response, again, so far, have been very commendable. So we will continue to push those opportunities.

[Operator Instructions]. And your next question comes from the line of Nehal Chokshi from Northland Capital Markets.

All right. Really nice June Q results, by the way. To me, significant narrative of the investment theme here is what you guys have been talking about returning to our heritage of gaining market share. So within that investment theme, can you characterize how you think you did in the June quarter? And what is embedded in your September quarter in terms of market share trajectory?

Yes. I mean, last quarter, I started to share, we engaged with another 3-year business drive, right? Large 5G Telco, Large data center and cloud and then software AI and service. So indeed, all the 3 new drivers, we have been growing pretty healthy way. For 5G Telco, we already have some handful customer engaged. Large cloud, we have some customer engaged. And then software AI in service, we continue to gain customers satisfaction, and that's why we like to further promote the scope to service older customers around the world. And we expect that these -- the feedback will be pretty healthy for our business plan.

Okay. And then for September quarter, do you expect that outperformance to continue, and that's what's embedded in your guidance, and therefore, you're actually expecting the overall market to be down as much as 15% year-over-year?

To be very directly, I mean, we just moved a lot of business to Taiwan, especially operations. And September, the impacts, the advantage from that should be limited. December, I would like to say will be much more significant. And then next year, we're sure we will see a lot of benefit from that. It will take some time to warm up.

Yes. Understood. And then, Kevin, you mentioned -- gave some additional detail regarding order trends being relatively weak in July. Is it fair to say it was actually trending down more than 10% year-over-year during the month of July?

Well, I'm not going to give a specific number like that, but July was one where it was certainly a weak month. And so we're glad that we've seen the trajectory turn here. So all of that is embedded in terms of the revenue range that we've given.

Okay. And why was there a lack of the $9.5 million R&D credit? Can you give more detail on that? And how should we think about going forward?

Yes. So last quarter, if you recall, we had a significant onetime event where we received $9.5 million from a partner for a cancellation of a program. And that's all we're just saying.

Got you. Okay...

It was a discrete of significant magnitude last quarter.

[Operator Instructions]. And there are no further questions at this time. I'll turn the call back over to our presenters for some closing remarks.

Thank you. I would like to thank you, our employees, customers and investors for their continued support. And thank you for joining us today and see you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.