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spk00: Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Supermicrocomputer Incorporated fiscal third quarter 2023 results conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Michael Sager, Vice President of Corporate Development. You may begin.
spk05: Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the third quarter, which ended March 31st, 2023. With me today are Charles Liang, founder, chairman, and chief executive officer, and David Wiegand, chief financial officer. 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've also published management's 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 guidance for the fourth quarter of fiscal year 2023 and the full fiscal year 2023. 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 fiscal 2022, 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 our company presentation or to our press release published earlier today. In addition, a reconciliation of gap and on-gap 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 cell site analysts to ask questions. And I'll now turn the call over to Charles.
spk01: Thank you, Michael, and good afternoon, everyone. Our revenue for the third quarter of fiscal year 23 totaled $1.28 billion. down five percent year on year and below our initial guidance range as we previously announced but our non-gap earning per share grew over five percent year on year to one point one dollar 63 cents compared to uh 1.55 a year ago while the quarter did not unfold as we expect I'm strongly encouraged by our current business momentum as we navigate market uncertainty with our new generation X13, H13, and H100 leading-edge products, especially in artificial intelligence. These new AI product demands from top tier companies had led us to challenge in terms of new key components availability. Compound with the economic headwind, our Q3 result was reflective of this difficulty, yet opportune condition. The good news is that we have already started to address this component shortage. pressure over the past few months, and we are in a much improved situation going forward. We have started to produce and ship some back orders since April. Here are a few highlights for the quarter. First, record pace of GPU leading edge design wins with growing back order, including winning at least two new global top 20 customers. Second, we refresh our entire product portfolio based on new CPU, GPU, storage, and fabric technology from key partners including NVIDIA, Intel, AMD, and others. And third, increase the customer demand of our large-scale plug-and-play solutions and continued expansion and transition from a server storage hardware manufacturer to a total IT solution provider. With applications like CHAP GDP that heavily count on large language modeling, LORM, and generative AI, the state of AI infrastructure business has grown rapidly. This AI momentum has benefited Supermicro greatly as we are deploying many of the world's leading and large-scale GPU clusters. In addition, we have built a close and collaborative relationship with NVIDIA over the years by co-developing and offering the most optimized and the fastest come-to-market GPU platform on the market. Online new generation product design with partner ecosystem is highly complex. As I mentioned earlier, multiple key components shortage delay our ability to manufacture and deliver a new system like the Delta Next GPU system last quarter. With the improving components availability this quarter, the new GPU system shipment will ramp up quickly. Indeed, we continue to scale up our manufacturing campuses in U.S., Taiwan, New Zealand, and Malaysia so that we can support our revenue growth in a much larger scale in the coming quarters and years. By leveraging our in-house building block design and manufacturing, we are well equipped to navigate through the current economic headwind. With our building block solution architecture, we always deliver workload-optimized new product to market faster than competitors, like with the recent NVIDIA H100 Intel Sapphire Rapid and AMD Genova release. The power consumption and thermal challenge of these new technologies have risen dramatically. And 40 kilowatt or even 60 kilowatt and 80 kilowatt racks the region demand are getting stronger and popular for computing Hungary data center and industry. Having high power efficiency and air, liquid, thermal expertise have become one of our key differentiator of success. Combined with our preliminary green computing strategy, that saved customers much TCO savings, our time to market advantage, and solution optimization via building blocks solution. We anticipate continuing to gain many more new design wins with this new generation product in the quarters ahead. We have made a solid progress in our total IT solution initiative by advancing our rack-scale solution capability. Provided there are no supply constraints, we can design, build, validate, process, and deliver turnkey rack-level solutions to customers within a few weeks of placing an order instead of months from competitors. SuperMineco's one-stop shopping total IT strategy, including AI, server, storage, networking, software, racking, cabling, power, cooling, integration, meditation, and management features, plus service. The idea is to let customers focus more on their applications and new software features. leave the IT hardware solution to Supermicro from cloud to edge. Currently, we are on track to support up to 4,000 racks per month of global manufacturing capability and capacity by the calendar year end. Our business is maintaining a growth rate that is multiple overall IT industry growth rate in the same period. We are doing so by efficiently taking market share in the new and faster-growing market. AI storage, on-prem cloud, embedded, and 5GH are all verticals. We see a potential to greatly increase our team. We are well positioned to support this highly specialized market. by optimizing our technology, design, and business automation at our US, Asia, and EMEA campuses. The great center at liquid cooling rack scale solution and production lines, product auto calculator, and online business automation will bring more value to our customer quicker with better quality. We are also improving our cost structure by scaling through our Taiwan and upcoming Malaysia campuses, which will be online soon with some of our key partners. While our March quarter result has some challenges, our new generation of products are in high demand. especially for AI, and we anticipate more customers deploying our product in large-scale product play. We continue to emerge as one of the largest global suppliers of total IT solutions and continue to gain market share. The strength of our product and technology keep us confident of delivering Q4 revenue in the range of 1.7 to 1.9 billion. If the supply condition improves, we expect to be above that range. Even some economical headwind is still ahead. In other words, I continue to expect our fiscal year 2024 revenue to be at least 20% year-over-year growth. and we are accelerating to reach our mid to long-term growth objective of $20 billion per year. Now I will pass the call to David Wagen, our Chief Financial Officer, to provide the additional detail for the quarter. Thank you.
spk07: Thank you, Charles. Fiscal Q3 2023 revenues were $1.28 billion, down 5% year-over-year, and down 29% quarter over quarter, which was below our initial guidance range of 1.42 to 1.52 billion. The shortfall was primarily due to key new component shortages for Supermicro's new generation server platforms, which have been mostly resolved to date. Our next generation AI platforms are driving record levels of design wins, along with strong orders from top tier customers and a record backlog. We are well positioned for a strong finish to our fiscal year 2023 as we ramp up deliveries of our new platforms to key customers. We note that our shipments against a record backlog may be constrained by supply chain bottlenecks due to high demand for our advanced AI server platforms. Q3 results were driven by our high growth AI GPU and rack scale solutions, which represented approximately 29% of our total revenues. and we expect significant future growth. An existing cloud service provider customer represented more than 10% of revenues for the first time. On a quarter-over-quarter basis, key new platform component shortages and seasonality impacted our three end market verticals. On a year-over-year basis, we had growth in our OEM appliance and large data center vertical, reflecting momentum with new data center and CSP customers. We recorded 646 million in the enterprise and channel vertical, representing 50% of Q3 revenues versus 53% last quarter. This was down 22% year over year and down 32% quarter over quarter due to new platform component shortages. The OEM appliance and large data center vertical achieved 601 million in revenues representing 40% of Q3 revenues versus 43% last quarter. This was up 37% year-over-year as we gained momentum with existing and new data center, CSP, and OEM cloud appliance customers, and down 23% quarter-over-quarter due to new platform component shortages. Our emerging 5G, telco, edge, and IoT segment achieved $36 million in revenues which represented 3% of Q3 revenues versus 4% last quarter. Systems comprised 91% of total revenue and was up 2% year over year and down 30% quarter over quarter. Subsystems and accessories represented 9% of Q3 revenues and were down 43% year over year and down 16% quarter over quarter. On a year over year basis, the volume of systems and nodes shipped decreased while system node ASPs increased due to higher product ASPs, especially for our AI product offerings. On a quarter-over-quarter basis, the volume of systems and nodes shipped decreased due to lower shipments from component shortages while system node ASPs increased. Geographically, during Q3, the US market represented 61% of revenues, Asia 17%, Europe 18%, and the rest of the world 4%. On a year-over-year basis, U.S. revenues increased 3%, Asia decreased 31%, Europe increased 11%, and the rest of the world decreased 29%. On a quarter-over-quarter basis, U.S. revenues decreased 28%, Asia decreased 35%, Europe decreased 27%, and the rest of the world decreased 20%. The Q3 non-GAAP gross margin was 17.7%. This was down 110 basis points quarter over quarter and up 210 basis points year over year. The decline in the non-GAAP gross margin was due to one, our efforts to gain market share in the rapidly growing AI server platform market with aggressive pricing targeting strategic large enterprises data center, and CSP customers. Secondly, lower factory efficiency from smaller sales volume and a learning curve in the production ramp of new platforms. The company's mainstream server business margin profiles were generally on par with last quarter. As we focus on gaining market share with our new AI platforms, we will target the optimal mix of revenue growth, gross margin, and operating profit to create long-term value for our shareholders. Turning to operating expenses, Q3 OpEx on a GAAP basis increased by 4% quarter over quarter and increased 5% year over year to $127 million. On a non-GAAP basis, operating expenses increased 7% quarter over quarter and increased 6% year over year to $116 million. OPEX increased sequentially due to lower NRE and marketing credits for new platform launches and higher headcount. The non-GAAP operating margin was 8.7% for the quarter versus 12.8% last quarter and 7.5% a year ago due to lower revenues and lower gross margins. Other income and expense was approximately $1.4 million in expense primarily consisting of interest expense of 1.3 million and a small FX loss as compared to 1.8 million in interest expense and a $6.3 million FX loss last quarter. Interest expense decreased sequentially as we paid down some working capital loans last quarter. The tax provision for Q3 was 11 million on a GAAP basis and 15 million on a non-GAAP basis. The GAAP tax rate for Q3 was 11% and non-GAAP tax rate was 14%. Our tax rates were lower sequentially due to higher discrete tax benefits realized in Q3. Lastly, our share of income from our joint venture was a loss of $1 million this quarter as compared to a loss of $1.4 million last quarter. We delivered Q3 non-GAAP diluted earnings per share of $1.63, which was up 5% year-over-year and down 50% quarter over quarter due to the lower revenues, lower gross margins, and higher operating expenses quarter over quarter. Turning to the balance sheet and working capital metrics compared to last quarter, our Q3 cash conversion cycle was 126 days versus 95 days in Q2. Days of inventory was 126, which was up by 27 as we built inventory to fulfill large new customer orders. Days sales outstanding rose 13 days quarter over quarter to 51 days, while days payables outstanding increased by nine days to 51. Working capital metrics were impacted by the, again, by the new platform component shortages, which increased inventory, and lengthen the cash conversion cycle as we could not fulfill all our sales demand. In fiscal Q3, we generated positive cash flow from operations of 198 million versus 161 million in Q2. Despite our quarter-over-quarter revenue decline, our operating cash flow benefited from continued profitability and the conversion of accounts receivable to cash. CapEx was $8 million for Q3, resulting in positive free cash flow of $190 million versus positive free cash flow of $151 million last quarter. The closing balance sheet cash position was $363 million. Total bank debt increased to $187 million as we increased our debt by $17 million during the quarter, while net cash increased to $176 million in Q3 from $135 million in Q2 due to strong operating cash flow. During Q3, we repurchased 1.55 million shares of our common stock for approximately $150 million, leaving 50 million remaining under our current $200 million share repurchase authorization, which goes until January 31st, 2024. Our board will determine the timing and amount of any future share repurchases. Now turning to the outlook for our business, we have a strong backlog of orders for new platforms entering the seasonally strong June quarter. We are working diligently with our strategic partners and customers to fulfill their requirements and are making steady progress in easing key supply constraints. For the fourth quarter of fiscal 2023, which ended in June 30, 2023, we expect net sales in the range of $1.7 billion to $1.9 billion. GAAP diluted net income per share of $2.13 to $2.65, and non-GAAP diluted net income per share of $2.21 to $2.71. We expect gross margins to be approximately 17% as we focus on gaining market share with our strategic new customers and platforms. As we improve our production efficiencies on the new platforms and gain scale with our customers, we expect our gross margins to improve. However, in the current AI growth AI market environment, we will continue to balance market share gains with gross margins. GAAP operating expenses are expected to be $145 million, which includes approximately $10 million in expected stock-based compensation and other expenses that are excluded from non-GAAP diluted net income per common share. GAAP and non-GAAP operating expenses are expected to increase in Q4 due to lower R&D NRE credits and higher personnel and marketing costs. We expect other income and expenses, including interest expense, to be a net expense of approximately 4 million and expect a nominal loss from our joint venture. The company's projections for GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 14.7 percent, a non-GAAP tax rate of 15.7 percent, and a fully diluted share count of 56 million for GAAP and 57 million shares for non-GAAP. The outlook for the fiscal fourth quarter of 2023 fully diluted GAAP EPS includes approximately $7 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal fourth quarter of 2023 to be in the range of $11 to $14 million. For the fiscal year 2023, ending June 30, 2023, we are tightening our guidance for revenues from a range of 6.5 $7.5 billion to a range of $6.6 billion to $6.8 billion, which would represent year-over-year growth of 27% to 31%. GAAP diluted net income per share from a range of $8.50 to $11 to a range of $10.14 to $10.66, and non-GAAP diluted net income per share from a range of $9 to $11.30 to a range of $10.50 to $11. The GAAP company's projections for GAAP annual net income assume a tax rate of 14.9% and a rate of 16% for non-GAAP net income. For fiscal year 23, we are assuming a fully diluted share count of 56 million shares for GAAP and 57 million shares for non-GAAP. The outlook for fiscal year 2023 fully diluted GAAP earnings per share includes approximately $33 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per common share. For fiscal year 2024, we are expecting a revenue growth of at least 20% based on strong customer demand for our best-in-class new AI platforms and total IT solutions. We remain confident in our long-term outlook for robust revenue growth and profitability, driven by our leading-edge new platforms, design wins, and significant new customers, our efficient global manufacturing capacity, and continued market share gains. Michael, now we're ready for Q&A. Operator?
spk00: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. We will take our first question from Nehal Chokshi with Northland Capital Markets. Your line is open.
spk03: Yeah, thank you. Very impressive buyback rate of $150 million and a quarter, $100 a share. So very strong statement that the shares are attractive prices. And nice to see that backed up with the $10.50 to $11 share fiscal year 23 guidance. So with that in mind, on the at least 20% year-over-year revenue goes to fiscal year 24, what's your level of confidence that Supermicro can operate you know, at the high end of the target model that you guys communicated two years ago, that being the 14 to 17% gross margin range.
spk01: Yeah, indeed, our confidence is very good. So, again, because of the economic headwind, so we tried to be more conservative here, but at least 20% year-over-year growth, and we expect, we hope more than that for sure.
spk03: And what about with respect to gross margin?
spk07: Yeah, so, so now we, yeah, back two years ago, we gave a 17 to 21%, 23%, you know, top line growth. Obviously, we were, we're in there at, at a minimum of 20%. And, and for the gross margins, we can, we continue to, to, like I said, to wrestle with with taking market share and also balancing that against gross margins. But we're confident with our new manufacturing facilities coming online that we will be able to improve our gross margins. And we also, as we come out of this quarter and we begin to ramp our new product offerings, that we will be able to improve margins as well.
spk03: Okay, great. And are you guys seeing any signs of general corporate IT demand weakness as the CDW pre-announce has indicated?
spk01: Yeah, the general IT market has slowed down a little bit. But the good thing is that we have lots of high-end, high computing, especially GPU product line that we saw very strong demand. So overall, our growth will be strong.
spk03: OK, and then did you guys have any 10 plus percent customers in the quarter and any expectations that that would contribute within the June quarter as well?
spk07: So we did have a a a new 10% customer this quarter. They're not a new customer, but they're a new 10% customer and we expect from time from you know from quarter to quarter and they hold depending on the delivery of these of our design wins. We will see. other customers over, you know, achieve over 10% of our revenue. So that will continue to happen.
spk03: And is that the expectation that there will likely be a new 10% customer pop up within the June quarter?
spk07: It's very possible.
spk01: Yeah, but at the same time, we are also gradually growing our brand name through our channel, through retail, and also through online business. So, we try to balance the growth between a large account and lots of small accounts. Great. Thank you very much. Yep.
spk03: Great. Great job, guys. Thank you very much. Thank you.
spk00: We will take our next question from Mehdi Hosseini with SIG. Your line is open.
spk02: Yes. Thanks for taking my question. A couple of follow-ups for me. I want to better understand. I remember last Earning Confidence College, you discussed your confidence in the backlog. And back then, there was a little bit of a push out of revenue opportunities from perhaps March into June. But you were very confident that as we approach June and September, it should materialize. And now, the magnitude of that revenue push out was more than expected. So what happened? If you were confident with the backlog in January, what prevented you to procure the key components? And I have a follow-up.
spk07: Sure. There was a shift. There was a dramatic shift toward, you know, new AI solutions, METI. And so, therefore, it was larger than anyone expected. And so the parts availability, you know, constrained the amount of shipments that we could do. You know, obviously we anticipated a slower quarter because the third quarter is seasonally slower. And we also mentioned, you're correct, we also mentioned some customers that tapped the brakes. and moved out to Q2, but it was really the component shortages that hit us this quarter.
spk01: Yeah, unfortunately, Q1, we have some customers postpone shipping, but at the same time, some other customers pull in and they want a high-end, especially GPU product line. And for those high-end GPU product line new design, yes, we have some key component shortage. including a GPU-CPU combination and kind of high-power thermal solution. So we did a very big effort to pull in those components. And now the situation has been dramatically improved. That's why we feel pretty good for June quarter.
spk02: Thank you for the details. And David, one cash flow item. In the December quarter, you were able to work on inventory, but then there was one non-working capital item which caused the decline in cash from operations. This quarter, March, it was actually the other way. You had to purchase inventory, but there was a positive non-working capital item that came in. Can you help me understand how I should think about these dynamics in working capital and how is it going to change looking forward?
spk07: Yeah, I think, you know, as we go out, Mehdi, I think that's a good question because we will, working capital wise, this fourth quarter is going to be challenging for me because we are going to be, you know, moving, acquiring a lot of inventory. And so that will challenge our cash flows during this quarter. So that's something the timing of inventory and shipments is critical. And as going into this Q4 or ending Q3, we were building inventory And yet at the same time, as Charles mentioned, we couldn't ship things because we didn't have all the parts that we needed. So we're growing inventory at the same time that we're constrained on shipping. So what that does is it caused our working capital metrics to go down a little bit, and that's evident in our cash conversion cycle. But I would say that in spite of that, we generated some of our best cash flow. We generated almost $200 million in cash flow, and we returned $150 million of that to the shareholders. So what I would say is that, yeah, going into Q4, cash flow is very important. But I think ultimately the business has shown that it generates very good cash flows.
spk01: Yeah, although like David said, recently cash flow a little bit tight, but we'll be very safe. I would have to say we'll be super safe and a little bit tight because we prepare, purchase lots of components for growing June quarter and following September quarter. I believe June and September quarter all will be very strong, especially September quarter, I would say. So we have to prepare components, and that's why cash flow will be a little bit tight, but will be super safe. Okay.
spk06: Thank you. I'll go back and use the queue.
spk00: As a reminder, it is Star 1 if you would like to ask a question. And we will take our next question from Ananda Barua with Loop Capital. Your line is open.
spk04: Yeah, good afternoon, guys. Thanks for taking the question. I really appreciate it. Two, if I could, at the risk of asking maybe the obvious, I think 90 days ago you guys had, Charles, said on your earnings call that you had expected in the second half of this calendar year, so September, December quarter, to be in a position to start, this is the way that I interpreted it, Charles, making a regular part of your book of business, the layering in of larger projects from the cloud cadre, from the AI cadre, like that. And I guess my question is, are you seeing, is what we're seeing in the June quarter that you're talking about, is that a pull forward of what 90 days ago we're anticipating later this year? You know, so is that dynamic happening sooner, kind of as you would describe it holistically, or is this something different than that? And then I have a follow-up. Appreciate it. Thank you.
spk01: Okay. Very good question. Indeed, June quarter, our demand is very strong but because of component shortage so at this moment we try to be conservative so that's why we we share with you 1.7 to 1.9 billion that's based on some shortage though if we can find those parts quicker then indeed the June quarter will be much stronger than that And September quarter like why you say what? That's why your question is September quarter. We will continue to be very strong and as well as December quarter, I believe. So now that really problem is a shortage. So we had to build a other components for inventory at the same time. We are not quite sure how much we can grow in this quarter, but for sure 1.7 to 1.9 should be a very safe number.
spk04: Really appreciate that. That's helpful context. And then I guess the follow-up is for Dave, Dave, for you. Just with regards to your gross margin comments, any greater context you can share that's responsible. I realize that this is sort of at the front end of beginning to mix in some of this larger footprint business, but would love to get a better understanding of how you guys are thinking about you know, sort of the gross margin manifestation if we think about the continued layering in of larger footprint, which may come at a slightly lower margin. Is it really that over time we should expect a greater presence of that lower margin business with some efficiency gains, or is it just in the beginning here the margin will be lower for the new business, but then collectively the P&L gross margin expands over time.
spk07: Yeah. So we're looking at it in your latter alternative, Ananda, and here's why. So right now there's three things that we've been facing. You know, we're having to face more air transportation costs in order to make our deliveries. So that impacts our margin. and also we're having to pay other expedite fees. That impacts our margin. Number two, we ran a lot less through our factories in Q3 than we did in Q2. So your margin efficiency, your ability to spread your fixed costs, it's tremendously impacted on a smaller scale. So as we scale up, we improve our margins. Thirdly, As we ramped our new product offerings, there is an efficiency on the production of these new products. So we are going to improve the efficiency of these products, which will improve the margin. And so those three things alone speak to margin improvements. But again, we believe we have best-of-breed AI products, and those are in high demand, and people are coming to us, and so we're very strategic about taking the market.
spk01: Yeah, I can add some comments. I mean, as I share, I mean, we are building $20 billion revenue, hopefully in mid-term, And that's why a grower capacity and support a large customer is very important to us. Once our volume become higher, our cost will be improved. And then the business operation efficiency will be higher. So we are doing very aggressive way to grow our revenue. And so, I mean, once we start to reach that number, I guess our growth margin will start to grow because we won't always invest for bigger growth after that.
spk04: I appreciate that context, guys. Thanks a lot.
spk00: And we will take follow-up questions from Mehdi Hosseini with SIG. Your line is open.
spk02: Yes, a couple of follow-ups. David, did you say that the effects for the June quarter will be around 145 million?
spk07: Let's see. That sounds about... We gave both GAAP and non-GAAP guidance, Mehdi. So our... Let's see.
spk06: The non-GAAP was 145? Yeah. Let's see. Yeah, yeah, 145 for GAAP. I'm sorry, GAAP or non-GAAP? It was, GAAP is going to be 145.
spk07: And that includes 10 million in expected stock-based comp. So that would, that means 135 for non-GAAP. Okay.
spk06: That's what I was looking for. Okay. And then CAPEX for the June quarter? We said 11 to 14 million. Okay, thank you.
spk00: And ladies and gentlemen, this concludes our question and answer session and today's conference call. We thank you for your participation and you may now disconnect.
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