Super Micro Computer, Inc.

Good day and thank you for standing by. Welcome to the Supermicro fourth quarter and full year fiscal 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to Nicole Nustiok.

investor relations please go ahead good afternoon and thank you for attending super marco's call to discuss financial results for the fourth quarter and full year fiscal 2021 which ended june 30th 2021. by now you should have received a copy of the news release from the company that was distributed at the close of the regular trading and is available on the company's website As a reminder, during today's call, the company referred to a presentation that's available to participants in the IELTS text for the company's website and the events and presentations tab. We've also published management scripted commentary on our website. Please note that some of the information you hear during our discussion today will consist of four looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other intimate expenses, taxes, capital allocation, and future business outlook, including the potential impact of COVID-19 and the company's business results of operations. There are a number of risk factors that can cause Supermicro's future results to differ materially from our expectations. We've learned more about these risks in the press release issued earlier this afternoon and most recent 10-K filing for fiscal 2020 and our other SEC filings. All these documents are available on the IR section of Supermicro's website. You see no obligation to update any forward-looking statements. Most of today's presentation referred 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 have a Q&A session from self-led analysts to ask questions. And now I'll turn the call over to Charles Liang, Founder, Chairman, and CEO. Charles.

Charles Liang Thank you, Nicole, and good afternoon, everyone. I'm pleased to announce that for the first time, our quarterly revenue has exceeded $1 billion. For fiscal Q4 2021, we delivered year-over-year revenue growth of 19.3%. For the whole fiscal year 2021, our revenue grew 6.5%. We have gained much share and finally resumed faster growth starting from March quarter this year after the impact from the past 10K delay and COVID-19 challenges. The revenue growth was driven by some wins from large enterprise customers and large multi-nation high-tech companies. These customers choose Supermicro because of our green computing technology, faster time-to-market, and part-and-play total IT solutions, especially in appliance, cloud, AI, and 5G markets. Now, let's look at some key highlights from the quarter. Our fiscal first quarter net sales totaled $1.07 billion, up 19.3%, most year-over-year and quarter-over-quarter, at the top end of our guidance range. This growth rate, I believe, is much higher than that of our industry. All our major geographics contributed double-digit year-over-year quarterly growth. Our fiscal first quarter non-GAAP earnings per share was $0.81, up from $0.68 in the same period last year. We saw a significant increase in sales from new and existing large high-profile customers. Our strong momentum is mainly driven by our business expansion from hardware solution to total IT solution. That consists of hardware, software, and service. We have doubled our software engineering resource in the past 24 months to allow us to swiftly execute this plan. Through engagement and close collaboration with strategically leading hardware and software partners, we have provided our customers more optimized, tested, certified, and ready to deploy reference architectures. As a result, large volume order are deployed timely without customers having to go through complicated process of hardware validation software compatibility, and supply chain disruption. It's a win-win for everyone. Earlier in fiscal Q4, we successfully executed the launch of Intel i7, AMD Mi 9, and NVIDIA A100 GPU-based product lines and began to ship more than 200 application-optimized product solutions. They are all based on the strong foundation of our server building block solution. These optimized systems are created in-house, leveraging close to three decades of subsystem innovations, including manageable enclosure, power supplies, and cooling technologies. What's more, our security and management software empower customers to deeply manage and scale in a timely manner, from enterprise to hyperscale. On the product side, our new Ice Lake-based X12 generation multiple node solutions against great traction among customers who are looking to scale out their enterprise and cloud data centers. from SuperBrain, MicroBrain, to BigTwin, FatTwin, and the upcoming GrandTwin. All these resource-saving product lines support a dense NVMe and often persistent memory, flexible GPU and LPGA configurations, providing optimized performance and a basic TCO to a variety of customer workloads. Our GPU product lines are continuing their strong growth with the explosion of AI machine learning application demands. These new iStack and Mi9 based GPU product line support larger on GPU memory and accelerated compute intensive applications. Our 2U2NO GPU system has proven to be a top seller since its introduction, thanks to its optimal mix of CPU to GPU ratio and resource saving features. Later this year, we will be introducing a brand new universal GPU product line. That will provide even more flexible configuration for many different CPU and GPU module combination. For the push that limit our system density and performance up to 50% when compared to competition. Along in June, during Computex 2021, our project player, RAC4.9, is a integral part of our complete solution strategy going forward this turnkey wax has undergone as solar solution level design and validation process and built securely for our ai 5g telco enterprise cloud and storage customers upon receiving these total ip solutions Customers only need to connect power and networking. Then they are immediately ready to run their applications. Shorten the time from making decisions to seeing results. To further improve sales and operation efficiency, we will launch our auto-converter tool to enable B2B, B2C automation, which will be thoroughly ready to service our customers in the coming few weeks. This tool makes it faster to achieve product optimization and more efficient to leverage the configuration among our sales, engineer, PM, and customers. We recently completed our Taiwan campus expansion. Now, we have a total 3 million square feet campus in Taiwan. We are equipped to deliver not only sufficient capacity, supply chain design, but also lower cost structure. Combined with manufacturing facility in Silicon Valley and Nassau, Supermicro is well positioned to grow market share with economical scale, agility, quality, and rapid delivery time to satisfy our customers' faster growing demands. We are working aggressively across our global supply chain to improve our critical parts shortage. In summary, SuperMineco has been solidly transforming into a total IT solution company from a server hardware company. In addition to providing the greenest hardware total solution, our software and service products are now ready for large enterprise, cloud, AI, and telco customers. Second, our Taiwan campus expansion doubles our solution capacity and lowers our cost structure. Now, if we decide to do so, we can start to reduce our expense in Silicon Valley headquarters if we select 2.0. Third, our business automation program, including the auto calculator, and B2B, B2C systems were significantly improved customer experience by streamlined customer configuration and order process, resulting in shortened solution delivery time with better quality and optimization. With the above summary, I believe our fiscal year 2022 revenue will reach at least 4.3 billion dollars. and start to grow much faster than our past four years. In closing, I'm pleased with the progress of our business transformation, which has started to speed up our business execution in fiscal 2021. As a total IT solution company, we are now able to grow business much more efficiently. and achieve our $10 billion revenue goal quicker. Perhaps we are able to pull in from 2026 to 2025 or even sooner. With that, I will now pass the call to David Wagon, our Chief Financial Officer, to provide additional details on the quarter.

David Wagon Thank you, Charles. We continued to accelerate in all major areas of the company and exceeded $1 billion in revenue for the quarter, which was at the high end of our guidance range. Growth was driven by wins from large enterprise customers and key high-tech companies worldwide, continued strength across all major geographies, and solid demand for our products and services. Our fiscal fourth quarter revenue totaled $1.07 billion, reflecting a 19% increase both on a year-on-year and quarter-on-quarter basis. Looking at Supermicro's Q4 revenue in our three-part verticals, we achieved $672 million in the organic enterprise and channel AI and machine learning vertical, $366 million in OEM and large data center vertical, and $3.1 million in the 5G telco edge IoT vertical. Systems comprised 78% of total revenue, and the volume of systems shipped was up year-over-year, while the nodes shipped were down year-over-year. System ASPs increased year-over-year and quarter-on-quarter. Performance strong across all major geographies this quarter. On a year-on-year basis, Asia increased 25%, U.S. increased 21%, and Europe increased 13%, while the rest of the world decreased 3%. On a sequential basis, U.S. sales increased 30%, Europe increased 14%, Asia decreased 1%, and the rest of the world increased 7%. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q4 gross margin was 13.7%, down three basis year-on-year and 10 basis points quarter-on-quarter. We expected our Q4 gross margin to improve 70 basis points, primarily due to three costs incurred in Q3. I suspect those costs did not repeat before. However, expedite fees and higher shipping costs increased by 50 basis points quarter over quarter. As reported by many other companies around the world, supply chain pressures related to the resurgence of variants of COVID-19 persist. Turning to operating expenses, Q4 OpEx on a GAAP basis was essentially flat quarter-on-quarter and decreased 7% year-on-year to $106 million. The decrease year-on-year was caused by a decrease in incentive bonuses, offset by higher headcount this year, which was primarily in R&D. On a non-GAAP basis, operating expenses increased 4% quarter-on-quarter and increased 9% year-on-year to $99 million. The quarter-on-quarter and year-on-year increases were related to headcount and other personnel costs as we continue to invest in human capital to address our growth opportunities. Other income and expenses included interest expense, which was a $2.1 million loss as compared to a $1.4 million gain last quarter. The sequential change is mostly related to FX. This quarter, our tax benefit was $1.6 million on a GAAP basis and an expense of $1.8 million on a non-GAAP basis. Our non-GAAP tax rate was 4% for the quarter. Lastly, our share of income from our JV was $0.6 million this quarter as compared to a loss of $0.3 million last year. Q4 non-GAAP diluted earnings per share totaled $0.81 as compared to $0.50 in Q3 of fiscal 21 and $0.68 in the same quarter of last year. Cash flow from operations totaled $64 million compared to cash flow used in operations of $124 million in Q3. CapEx totaled $13 million, which is a low of $50 million. Key uses of cash during the quarter included increases to inventory and receivables, while key providers of cash included an increase of $144 million in accounts payable and $12 million in deferred revenues. The increase in deferred revenue was due to higher sales of our service contracts. We also used $12 million purchased shares this quarter. Our closing balance sheet cash position was $232 million, while bank debt was $98 million, resulting in a net cash balance of $134 million. Turning to the balance sheet and working capital metrics compared to last quarter, our Q4 cash conversion cycle was 80 days, which was down from 86 in Q3, beating our target range of 85 to 90 days. While the absolute level of our days of inventory at 96 days decreased, Days sales outstanding was 37 days, while days payables outstanding totaled 53 days. Now, turning to the outlook for our business. We expect net sales in a range of $900 million to $980 million, which results in gap-diluted net income per share of between $0.16 and $0.36, and non-GAAP diluted net income per share of $0.28 to $0.48 for the first quarter of fiscal year 2022, which ends September 30, 2021. We expect gross margins to remain at similar levels sequentially in Q1, with upside potential as we continue to manage supply chain costs and maintain price discipline. Over the upcoming quarters, we expect to achieve margins within our target model as we further scale out our Taiwan operations and begin to gain traction from our new product offerings and auto configurator B2B and B2C solutions. GAAP operating expenses are forecast to be approximately $110 million and include $7 million in stock-based compensation expenses and $1 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense, to total roughly $2 million and expect a nominal contribution from our JV. Non-GAAP operating expenses are forecasted to be up quarter on quarter from continued investment in R&D, lower NRE expected, and higher personnel costs. The company's projections for GAAP and non-GAAP diluted net income per share both assume a tax rate of approximately 16% and a fully diluted share count of 53.7 million shares for GAAP and 55 million shares for non-GAAP. The outlook for Q1 of fiscal year 2020 gap diluted net income per common share includes approximately $8 million in expected stock-based compensation and other expenses, net of taxes, that are excluded from non-gap diluted net income per common share. We expect net sales in a range of $4.1 billion to $4.5 billion GAAP diluted net income per share of at least $2.60, and non-GAAP diluted net income per share of at least $3 for fiscal year 22, which ends June 30, 2022. The company's projections for GAAP and non-GAAP diluted net income per share both assume a tax rate of approximately 16% and a fully diluted share count of 55.3 million shares for GAAP and 56.5 million shares for non-GAAP. The outlook for fiscal year 22 GAAP diluted net income per share includes approximately $30 million in expected stock-based compensation and other expenses, net of taxes that are excluded from GAAP diluted net income per common share. We expect CapEx for the fiscal first quarter of 2022 of approximately $14 to $16 million. Nicole, I'll turn it back to you for Q&A.

I'll call you. You can open the line up for questions.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of Mehdi Hosini with SIG. Your line is open.

Yes, thanks for taking the question. I have a couple of follow-ups. If I were to take the midpoint of guide range for fiscal year 2022, it seems like maybe there is a little bit of leverage in operating profit, in other words, and maybe a 200 basis point of improvement to get to $3 of earning. What I want to understand is, what are the key assumptions for component costs? Is this a base case or very conservative case? And I have a follow-up to that.

I would rather say it's based on conservative base because the supply chain continues to be very tight. And although we have a good relationship with all of our suppliers, but anyway, it's a global shortage problem. So it's a conservative base. But because our operation now able to dramatically expand to Taiwan, so that will lower our overall cost.

Right. So where is the most... What segment of the supply chain are you experiencing the most shortage? What are the key components that you relatively have the most difficult time procuring?

IC chip, especially IO chip.

OK. And question on the cash flow. What was the depreciation amortization for the recorded June quarter and what should we assume for fiscal year 22? I'll have to get back to you, Maddy. Okay. Given the CapEx growth in fiscal year 21, almost $60 million, and the build-out of a Taiwan facility, should we expect CapEx to moderate from here?

Absolutely. Yes, because our Taiwan operation is pretty much ready. We added about 200 staff in Taiwan in the last 12 months. And all the people have been well trained. And they just moved into the new building last month. Other than that, you know, our feeding is automation, as we just mentioned, for B2B, B2C, and auto configurator. We hire people and train people, and they are about already and start to offer service to certain customers. And we will broadly apply to all our customers in the next few weeks. Okay, great. So the investment has been there.

So, Charles, are you inclined that the capex should decline in fiscal year 2022?

Maybe because we are growing. I mean, 2022, 23, 24, we expect to continue to grow. So I guess the operation expense won't shrink, but may grow very kind of consistently, but limited growth because we already invested there.

Okay. All right. Thank you. I'll get back to you. Thank you.

Your next question comes from Nihal Chokshi with Northland. Your line is open.

Yeah, thank you, and congratulations on strong results, especially in free cash flow. We were expecting a drain based on commentary from last quarter and generated very nice free cash flow. It looks like the big delta relative to our expectations was an increasing base payable. And given this environment of a constrained component environment, I mean, how was this pulled off, basically?

So now we did have a lot of inventory that came in near the end of the quarter, and so that's what caused accounts payable to rise and with a resultant rise in GPO. Okay.

Now I consider it positive to keep kind of a high inventory. because we strongly believe a customer needs those products.

And so, by the way, yeah.

Go ahead, sorry, please.

You can tell from our forecast, from our revenue forecast, that our sales are not dipping as they traditionally do in Q1. And so, therefore, we needed to have more inventory on hand, which was why I alluded to the challenges of cash flow for this projecting cash flow for Q4. But we ended up in a good position.

I see. So I guess because we built up the inventory at the end of the quarter to satisfy the strong demand you're seeing in the September quarter, and the balance sheet is showing up as increased base payable, but what you're saying is that your base payable terms actually didn't increase. It's just simply the timing at which you received the inventory. That's exactly right. Got it. OK. Understood. OK. and i don't recall the last time you guys gave full year guidance um i'm not sure if you ever have before but certainly i don't think you did during fiscal year 21 or fiscal year 20 or past few years when you're in 10k filing delay hell um so what has changed to give you visibility guide on the full year basis and importantly almost 10 about the consensus estimate

not much reason but pretty much because we have a successful expansion in Taiwan and also a business automation including auto calculator and B2C tool and also company expanding from a hardware solution company to a total IT solution company so we thought it's a good idea to offer the market kind of a more completed picture for a whole year and in the future

Okay. All right. And in this midpoint 20% growth guidance for fiscal year 22, is this tied to any sort of industry growth expectation?

I'm sorry, what was the last part of your question? Is it tied to what?

Is it tied to server industry growth, any sort of server industry growth expectation, or is it independent of server industry growth?

Not quite, not quite. As we mentioned, we had returned to a faster growth in this model. If you remember before 2017, before the 10K delay, our growth always had been two times. four times faster than the industry. And we believe we are returned to that faster growth being this modern now. So start from March and June, last quarter, we start to outperform the industry. And I believe we will start to outperform the industry growth rate, maybe double or triple or even more, looking forward. So we are getting much share in the other world.

Yeah, undoubtedly, clearly. But is there a particular industry growth rate that you are expecting in order to drive that 20% year-over-year growth, i.e. We believe that industry may grow 5% to 10%, and our growth rate should be double to quadruple of that, hopefully. Okay, great. And then my final question is that the minimum $3 per share, does that correspond to low end of the revenue guidance or to the midpoint of revenue guidance?

I would rather say it's a conservative number.

Okay, great. Thank you. I'll see you at the floor. Thank you.

Your next question comes from the line of Ananda Brewer with Loop Capital. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question. And congratulations on the strong revenue execution and the visibility to put out a long-term fiscal year rev guide here. I guess a couple for me if I could. David, could you just walk back through the components that you spoke to on gross margin? I just want to make sure that – that I'm straight on those. And then I have a quick follow-up as well.

Certainly. So when we finished last quarter at 13.8, we had about 70 basis points of discrete costs, which included some shipping costs as well, but mainly it was principally some discrete costs that we didn't expect to occur. So this quarter, those did not occur, but we did have 50 basis points more of shipping costs. And it was really caused by our directed effort to deliver product to our customers on time. Because that's what our customers expect and demand. So that's really the reason that we were not able to raise the margin of hire. I got it.

Yeah, I got it. Cool. And so if you lost the $70,000, that took you to $13.1 million, and then I got it. Sorry, you lost $70,000, and you gained $70,000. So that would take you to... 14 and a half or so. And then you had 50 more. So that would have taken you back down to 14. And then was there, I think I'm doing that math right. Correct me if I'm wrong. And then was there an incremental 30 basis point headwind that brought it down to the 13.7? Well, there was. We had two things.

One, we had deferred revenue that we added to a balance sheet of about $12 million. So we had to carve out some income for our services. And we also had just the rest was just product mix, Ananda. Got it. Got it.

Okay. And then, like, how should we, what are the sort of the pushes and the pulls? You made mention in the remarks that you expect in the coming quarters to move up into the uh into the 14 to 17 percent range what are the what are the pushes and pulls there uh and if there's any way to give them by order of magnitude that would be helpful also sure absolutely so we um we we realized that with the the delta variant it's hard to say that that uh the covet is over

And so, therefore, we expect to continue to have challenges on supply chain shipping costs. However, we do expect our other initiatives, such as our transition over to Taiwan and our new product offerings, especially in those verticals that have more attractive gross margins, as well as our B2B and B2C configurator, we expect the benefit of those things to start to come to the business in the upcoming quarters. So in the short run, we know that Taiwan has gone online. However, it's going to take a couple quarters to start to realize benefits.

Any – could we – I'm not the only one sort of intrigued about this. Any chance we could get you to give us some sense of, for fiscal 22, what the gross margin could look like?

So we've given guidance on the top line and the bottom line, but we're not going – other than the fact that we expect gross margins to improve, we're not giving further guidance.

I got it. But it's not unreasonable to think that you would be in the range by the end of the year, end of fiscal year.

Yeah, our target is to go, and I think this is in the notes, our target is to be back within our range, you know, during the year. Okay. Yeah, our range, by the way, was 14 to 17, yeah. Yep.

I appreciate it. I'll give back in the queue here. I appreciate it. That's really helpful. Thanks.

Your next question comes from the line of Aaron Reekers with Lost Fargo. Your line is open.

Yeah. Hey, guys. Thanks for taking the questions, and congrats on the quarter. I'm just curious, as the industry, not just you guys, but the industry as a whole, you know, deals with supply chain shortages, semiconductor IC shortages, etc., I'm curious, on your side of the business, have you been able to invoke your own customers to provide you with extended lead times? And has that provided you with better visibility? And then on the heels of that, kind of tied to that question is, is the guidance for this current quarter assuming that you would have actually outperformed that number if you were able to get all of that, all of the supply to meet demand? Put another way, are you able to meet demand as you see it in the current quarter?

Very good question. Again, although we try whatever possible we could, but still we cannot get whatever we want. So we cannot ship all that demand to our customer. But I would have to say, We can ship most of that. Maybe customers still have to wait longer than regular time. And the good thing is we have lots of repeated customers, older customers. So they understand the global difficulties. So longer the time, yes, people don't like to see that. But basically, they are cooperatives. So we cannot ship whatever customer needs, but basically customers are happy with our basic service.

And what is your current view of, you know, expectations of when that normalizes? Does your fiscal 22 guidance reflect the view that the tightness in the semiconductor supply chain starts to normalize through this fiscal year, or do you think it's out further than that? Just curious on what your thoughts are.

Yeah, I mean, as I shared before and now, traditionally, our growth rate was double to quadruple faster than the industry. And I believe we already get back to that momentum, double to quadruple faster than the industry. But because of the global shortage, that impacts our growth a little bit, for sure. And that's why we are humbled to say maybe $4.3 billion. even now because of big shortages globally. I believe our growth will be much better than that.

Yep, yep. And then the final quick question is, you know, there's a lot of architectural things going on in the server and, you know, the universe around semiconductors and so on. You know, I'm curious of how, what kind of growth that you're seeing in GPU-accelerated server platforms, and, you know, do you think that there's a longer-term narrative that we're at the point where actually... the richness of the server configurations can really drive a positive upward trend in blended ASPs for, you know, foreseeable future. I'm just curious to how you're seeing compute architectures evolve that maybe benefits you guys from a growth perspective.

You know, as a technology company based on Silicon Valley, we like a technical challenge. We like new technology. That's why lots of different CPU, lots of different GPU, lots of different platforms, lots of big changes to us. And that's why I just mentioned we will introduce Grand Twin, a brand new architecture to the market very soon. and we also are designing a universal GPU platform, and that will be ready by end of this year. So all of those is to provide a much more flexible kind of support on multiple different CPUs, multiple different GPUs, and different form factors. So all the platforms will benefit our customers. And thank you to our solution. We are able to kind of carefully kind of optimize the by our new architecture, and especially Grand Twin and kind of universal solution. So we are very happy, very excited to see the opportunity.

That's great. Thank you very much.

Thank you.

Your next question comes from the line of John Sanuantang with CJS Securities. Your line is open.

Hi. Good afternoon, guys, and great quarter. And also the outlook is pretty impressive. I wanted to drill down on a previous question just on how you have confidence in that $4.3 billion in revenue. Is that a bottoms-up analysis with, like, you know, qualified customer leads, indications of interest, contracts that may have already been signed, or is there more –

you know um uh orders that you actually have to go out and get before you can achieve that i'm wondering how you built to that uh it's both uh bottom up and top down from both directions we see that growth will be very strong again even not because of global shortage our growth should be much better than that And with a better product, with our Taiwan operation, and with also many more new engaged high-profile customers, we achieved in the last six months and currently. So we feel pretty optimistic over that.

Okay, great. And I was going to ask, How do you feel about your ability to pass price through in this environment? You talked about expedited shipping. I know that you were doing air freight last quarter just to get things to customers on time. I would think that everyone knows at this point that it's impossible to get things without paying for extra shipping charges. So I'm wondering if you're planning on surcharges or other pricing methods to be able to pass that through to the customer, and if so, are they receptive to it?

Very good question, and a complicated question, too. So we try, wherever possible, to communicate to customers. But overall, we have to absorb, I would say, at least 50% of that, while maybe pass 50% to customers. So we try to provide the customer a very cooperative way so that we can grow market share as well.

OK, great. Maybe just one final one on pricing. When do you think you can catch up on pricing to the higher input cost? Is it a quarter or is it two? How should we think of the lag time before you're able to absorb all of that?

Again, it's a complicated question because of the pandemic. They have variants still going on. So once COVID-19 ends, I believe we will recover to normal. But before that, we are getting... able to pass those overhead extra costs to customers. Likewise, maybe 50-50 in last quarter, and we are getting better, but hopefully COVID-19 problem can end very soon. So, you know, we will get back to normal automatically.

Okay, great. Thank you, and congrats again. Thank you.

Your next question comes from the line of John Lopez with VertiColor Group. Your line is open.

Thanks very much. Can you hear me all right? Yes.

Sorry.

That's great. I had phone trouble. Sorry about that. Thanks, David. So I can say two. I wanted to come back for a second to the fiscal Q1 guidance and maybe to come at it this way. I thought in some remarks you made, you referenced like not declining and in fiscal Q1. But I guess as we calculated, it's actually a bit below your normal seasonal trending pattern. And that's after being pretty comfortably above that pattern in the last two quarters, so both fiscal Q3 and fiscal Q4. So I guess my questions are, one, are we looking at those numbers differently than you are? Maybe just Step me through what you meant when you said not declining. And two, is there any constraint on your revenue guidance relative to component or logistical issues? Perhaps if you quantify that. Thanks.

Sure. I think what our range does is our range allows for the struggles that we face in the supply chain. So therefore, we feel like we've provided a broad enough range that we can overachieve, but we feel comfortable with that range.

I guess the other factor is that because last year, COVID-19 reason, we did not adjust the employee salary that much. So this year, we have a much bigger salary adjustment for employees. That's why you see Q1, Q2, you may see our expenses grow. One big portion because of salary adjustment. And also Taiwan expansion. So we hire people in Taiwan and train people, but they will be ready to contribute to our revenue and profit very soon.

Okay, thanks. Yeah, I guess that helps a bit. I guess my other question, just to come back to the gross margin for a second. So to arrive at this $3 figure or north of $3 figure, especially based on what you're referencing there, Charles, I mean, the gross margin does need, I think, to be pretty close to 15% as we get out of calendar Q3 and into the remainder of your fiscal year. I guess, why do you think, like do any of these things feel as though you have line of sight to them ending? As we look beyond calendar Q3, and if not, are you committing that you get the $3 some other way? Like, will you rein back on OpEx or just maybe walk us through the interplay between why you might have comfort in the $3 number if you don't have visibility to some of these logistical issues or cost issues abating?

David, how about you?

Sure. So one of the things that helps our cost structure again is the movement of our production over to Taiwan. So we expect that to give us benefits. as well as the traction in our new product offerings, which we expect to bring higher margins than the traditional server business. So those are the factors that we have insight into and give us confidence that in spite of supply chain challenges, which we've managed to meet, And in spite of higher costs, which we, you know, in terms of shipping and, you know, and air freight, which we've continued to deal with, we still believe that, you know, that through, you know, price management, that we can achieve the margins which will allow us to deliver the targets that we are forecasting.

Yeah, the other way to answer your question more directly is that we explain our growth will be significant in fiscal year 2022 and 2023. And we are very confident to see that happen. But if in case it did not happen, then that means we have too much resource now. So we may reduce some resources in U.S. headquarters. I hope we don't have to do so, but if we have to, we will. And we have that option. So that will help reduce our operation costs for sure. But I hope we don't have to go that way.

Okay, understood. Thanks for the thoughts, guys. I appreciate it. Thank you.

We have a follow-up question from Maddy Lucini with CIG. Your line is open.

Thank you. Just a quick follow-up. I want to get your view on the current – memory prices, how do you see the trend over the next one or two quarters? And I'm asking you about availability and the pricing trends.

Very complicated question, but very good question. Yes, it's hard to predict. At this moment, we see the availability is getting better than last quarter. So the price changes should be less than before. And as to when the price will stop growing or the price will go down, we watch very carefully. So at this moment, no clear date. But at least we feel it's better than last quarter.

Sure. Okay.

And very much better.

Yes. Yeah. Thanks for the call. I know it's very difficult to look beyond a couple of months. As you think about your FY22 revenue guide, how should I think about incremental opportunities? There are a lot of AI-type projects that hyperscalers are expected to ramp. Do you think your FY22 revenue guide captures some of them, or should we wait for FY23 revenue to see a more meaningful material contribution.

Good question. I mean, for AI, we grew very well in fiscal year 21. And year 22, I believe we will continue to grow very well, maybe more than 50%, I hope, right? And for telco, telco is another territory we grew very well last year. And I believe this year, 2022, our telco business, will grow much better than even last year. So that's a very strong area for us. As to hyposcale, with our Taiwan operation now is ready. So we have a chance to start to service some hyposcale customers if we select two. But I believe we will be very selective. For some really good customers, when we can provide a value, we will.

And Charles, when you talk about AI, does that include kind of the ARM-based basic CPU, or do you lump that into the hyperscaler segment?

Very huge question. But yes, we have some ARM design as well. So if customers really prefer ARM solution, we have some solution there under development.

OK. So when you talk about AI, it's not necessarily an ARM-based solution. It's more general, right?

No. Mainly, they are Intel and AMD-based. Intel, AMD, CPU, NVIDIA.

Sure. Sure. But when you reference hyperscalers, that's predominantly ARM-based solutions.

Not necessarily. Hyperscale to us is still x86 mainly.

Okay, got it. Okay, so we can't really isolate it because perhaps it's just too early to determine on this independent on-base solution, right?

When customers need that, we will have it ready.

Got it. Okay. Thanks for the details. I appreciate it. Thank you.

And for the last question, we have a follow-up from Ananta Brua with Loop Capital. Your line is open.

Hey, thanks, guys, for the follow-up. Yeah, just wanted to ask any context you can give us about how to think about revenue seasonality through fiscal year 22. you know, will there be a seasonal pattern or will it be, I mean, there will be a seasonal pattern, but will it be different than usual and fairly radical on a year-over-year basis? Thanks.

Yeah, as you may know, right, September always our weak season. So at least we are no exception, right? Although we have a strong demand by global shortage. That major reason we try to be conservative when we share that number with you for September quarter.

And then, Charles, through the rest of the year, should we just assume, you know, typical seasonality to get into the guidance range?

Yeah, basically. Traditionally, December and June always are our good quarters.

Awesome. Okay, great. I appreciate it. Thanks a lot. Thank you.

Thank you. This concludes this conference call. Thank you for joining. You may now disconnect.