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spk11: Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Supermicrocomputer Fiscal First Quarter 2024 Results Conference Call. With us today, Charles Leanne, Founder, President, Chief Executive Officer, David Ryan, CFO, and Michael Steger, Vice President of Corporate Development. 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, please press star followed by the number one on your telephone keypad. Thank you. I will now turn today's call over to Michael Steger. Please go ahead.
spk02: Good afternoon, and thank you for attending Super Michael's call to discuss financial results for the first quarter, which ended September 30th, 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 of 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 script and commentary on our website. Please note that some of the information here during our discussion table consists 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 second quarter of fiscal 2024 and the full fiscal year 2024. There are a number of risk factors that can 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 2023, and our other SEC filings. All 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 presentations 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 to reconciliation of GAAP and non-GAAP results contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's fair remarks, we'll have a Q&A session for cell site analysts to ask questions. I will now turn the call over to Charles.
spk05: Thank you, Michael, and good afternoon, everyone. Today, I am pleased to announce that we are off to a good start for Fitch Co. With first quarter revenue of 2.12 billion. We navigate tied AI, GPU, and key components supply conditions to deliver total solution and large compute cluster, especially for generative AI workload, where our back order continue to expand faster than our forecast. During the first quarter, demand for our leading AI platform in plug-and-play rack scale, especially for LLLM-optimized NVIDIA HGX H100 solutions, was the primary growth drive. Many customers had started to request direct-attached cold-play liquid cooling solution to address the energy cost, power grid constraint, and thermal challenge of this new GPU infrastructure. In some cases, customers are able to double their data center AI computing capacity using our ELC, direct attached liquid cooling solution, due to lower system power requirement, lower PUE, and higher computing density per cluster. To meet this strong demand, we have been continuously expanding our vegetation and production facilities By the coming March quarter, we expect to complete a dedicated capacity for manufacturing 100 kilowatt a rack with cooling capability. That will further expand our total rack production capacity to 5,000 racks per month in full speed mass production. The increased AI business also includes our new influencing platforms and the Telco Optimized Edge products based on NVIDIA L40s, L40, and L4, and for sure, Edge 100 as well. AI product lines. Furthermore, the upcoming Grace Harper Superchip-based MGX products for both generative AI, and influencing AI are just ready for volume production. Our AI solution portfolio also includes Intel, Gaudi 2, PCIe, Flex, PVC, Conan from tobacco, as well as AMD MI250 and MI300X and MI300A-based platforms. We fully expect many of these products to gain broad adoption and expand our share in the accelerated computing market. Let's go over some key financial highlights. Fiscal Q1 net revenue total $2.12 billion, up 14% year-on-year and down 3% quarter-on-quarter. toward a high end of our guidance range of $1.9 to $2.2 billion, despite the GPU and key components shortage during our traditional soft September quarter. Fiscal Q1 non-GAAP earnings of $3.43 per share were in line with $3.42 a year ago. towards the high end of our guidance range of $2.75 to $3.50, demonstrating continuous strong operating leverage during a traditional short quarter. We launch and deliver end-to-end liquid-cooled data center solutions. We foresee up to 20% of our data center deployments will move to liquid cooling, and for the first time, customers can get a complete large-scale liquid cooling solution from a single source with a minimum lead time of about two weeks. Supermicro is working hard to fully tackle the current AI growth opportunity by speeding up the development of more new AI-optimized platforms. Supermicro is utilizing its building block architecture to continue our first-to-market DNA with the launch of NVIDIA CG1, CG2, Grace Harper Superchip, and NVIDIA Grace GPU Superchip, as we speak. Supermicro-status MGX system provides groundbreaking computing density, energy efficiency, and easy data center deployment and serviceability. idea for hyperscale and HDR center.
spk04: I believe this ongoing AI revolution will impact all industry and the world, possibly much more impactful than the industrial revolution over 200 years ago.
spk05: As most people know, the power consumption and thermal challenge of this new AI technology and reaching dramatically. We are now shipping up to 80kW per rack solution with 100kW per rack just around the corner for compute, intensive data center, CSP, and other industries. Our high power efficient system, free air, and liquid cooling expertise have become one of our key initiators of success. I anticipate that up to 20% or more of global data centers will transition to liquid-cooled solutions in just a few years. In addition, a combination of increasing computing density, reducing TCO, and liquid cooling reduce the environmental impact of data centers significantly. This is well aligned We should promote the green computing mission as we improve data center performance per watt, per square foot, and per dollars. To better support traditional data center, enterprise, and IoT tech or industry, we have begun a seeding and early shift for our upcoming fifth generation Intel Xeon processor, codenamed M1 Rabbit. and shipping first-generation AMD EPYC processor, codename Genova N, SP5 and SP6, with more computing code, PCIe Gen 5, CXL, and many other workload-optimized features. For customers that want to test these latest systems, We offer our Jump Start program with remote access to our high-end X13, H13, and GPU systems for qualified customers, workload, validation, testing, and benchmarking before volume deployment. As the performance of CPU, GPU, and memory technology increase, enhancing storage performance is also necessary. to feed the massive data sets to the applications without becoming a bottleneck. That slowed the entire system or cluster down. Supermicro's new PCIe Gen5-based E1S and E3S pedascale all-flash storage serve over industry-leading storage performance and capacity. Together with our Utah 2 MVME, system and traditional storage platforms. We are fulfilling customers' AI, compute, and storage needs with one-stop total solution shopping experience. Supermicro's total IT solution has been recognized as saving customers from the complications of design, validation, sourcing, integration, and on-site deployment. We are also implementing their networking, switching, firmware, and software management challenges, topping it off with our 24-7 global deployment and service teams. Essentially, our customers are now incorporating our capability into their long-term infrastructure plans. entrusting Supermicro to provide them with fully optimized solutions and with scale capacity to fit their long-term needs. Given our current customers' infrastructure demands, we have continued to evaluate our footprint beyond our ongoing expansion in Malaysia. We are adding several new buildings close to our headquarters in Silicon Valley campus. and on track to surpass our current capacity of 4,000 rack per month. Today, with utilization rate at about 60%, our U.S. headquarter and Taiwan facility can easily support at least $18 billion in revenue. The new Malaysia facility will serve building blocks with high volume scale and improve coastal structure. pushing our total revenue capacity to a much higher scale than $20 billion. We are also continuing to work with some of our key partners and are deep in the planning process of adding a new manufacturing campus in North America outside of California for Coastal.
spk04: We are just
spk05: celebrate our 30th anniversary in September. For the past 30 years, we have been working tirelessly toward gaining industry leadership position with a best in class product portfolio, global scale capability and capacity, and the best time to market. Distinguish ourselves from the competition. Our IT industry leadership position will be even stronger in the near future. The pipeline or the new product in the coming quarters have never been stronger. We are gaining much momentum that I expect to build deeper into 2024. Even we confidence that fiscal Q2 revenue will be in the range of 2.7 to 2.9 billion dollars. Additionally, we are expecting continual strength for the second half of fiscal year 2024, and now forecast revenue in the range of $10 billion to $11 billion. Our position as the leading supplier of large-scale plug-and-play total AI and IT solutions has just begun. Our growth will accelerate. as we deliver more optimized AI infrastructure to existing and emerging markets. Along with our growing software and service value, I also look forward to providing more updates on our ODAG-9 in the coming quarters. They will continue to extend our data center technology leadership for years to come. With that in mind, I expect our $20 billion annual revenue target to be just a couple of years away. Before passing the call to David Wiggin, our CFO, I want to take this chance to thank you to our partner, our customer, our super macro employee, and our shareholder for your continued support.
spk07: Thank you, David. Thank you, Charles.
spk08: Fiscal Q1 2024 revenues were $2.12 billion, up 14% year-over-year and down 3% quarter-over-quarter. Revenues were towards the upper end of our guidance range of $1.9 to $2.2 billion, driven by AI-related platforms, despite supply chain challenges and summer seasonality. Next-generation AI and CPU platforms continue to drive strong levels of design wins, orders, and backlog. We expect diversified growth in fiscal year 24, driven by top-tier data centers, emerging CSPs, enterprise investments in new AI CPU servers, and edge IoT telco markets. We're also enhancing our offerings in storage, switches, software, and services, strengthen our total solutions offerings. During Q1, we recorded $917 million in the enterprise and channel vertical, representing 43% of revenues versus 45% last quarter. This was up 10% year-over-year and down 6% quarter-over-quarter due to seasonally lower enterprise spending as customers focused on AI investments. The OEM appliance and large data center vertical revenues were $1.17 billion, representing 55% of Q1 revenues versus 53% last quarter. So this was up 26% year-over-year and flat quarter-over-quarter. One existing CSP large data center customer represented 25% of total revenues for Q1. Our emerging 5G telco edge IoT segment revenues were 31 million, which represented 2% of Q1 revenues. AI, GPU, and rack scale solutions, again, represented over 50% of our total revenues this quarter, with AI GPU revenues in both the enterprise channel and the OEM appliance and large data center verticals. The mix of complete systems, Storage and rack scale total IT solutions has increased over the last two years. Server and storage systems comprise 93% of Q1 revenue and subsystems and accessories represent 7%. ASPs increased significantly on a year-over-year basis and decreased slightly quarter-over-quarter, driven by product and customer mix. By geography, the U.S. represented 76% of Q1 revenues, Asia 11%, Europe 9%, and the rest of the world 4%. On a year-over-year basis, U.S. revenues increased 25%, Asia decreased 17%, Europe decreased 19%, and the rest of the world increased 63%. On a quarter-over-quarter basis, U.S. revenues decreased 3%, Asia decreased 4%, Europe decreased 16%, and the rest of the world increased 38%. The Q1 non-GAAP gross margin was 17%, down slightly quarter over quarter from 17.1%. We continue to focus on winning strategic new designs and gaining market share. Turning to operating expenses, Q1 OpEx on a GAAP basis increased by 25% quarter over quarter, and 42% year-over-year to $181 million driven by higher stock-based compensation expenses and headcount. On a non-GAAP basis, operating expenses decreased 3% quarter-over-quarter and increased 11% year-over-year to $130 million. Our Q1 non-GAAP operating margin was 10.8% versus 11% last quarter and 12.5% a year ago due to changes in revenues, gross margins, and operating expenses. Other income and expenses for Q1 was approximately $4.7 million, consisting of $1.9 million in interest expense offset by a net gain of $6.6 million principally from foreign exchange. Our interest expense decreased sequentially as we paid down our debt during the quarter. The tax provision for Q1 was $20.2 million on GAAP basis and $36.2 million on a non-GAAP basis. The GAAP tax rate for Q1 was 11.4%, and the non-GAAP tax rate was 15.5%. We delivered strong Q1 non-GAAP diluted earnings per share of $3.43, which was at the high end of the guidance range of $2.75 $3.50 due to revenues toward the higher end of the guidance, stable gross margins, lower non-GAAP OPEX, and foreign exchange gains. Cash flow generated from operations for Q1 was $271 million compared to cash flow used in operations of $9 million during the previous quarter due to continued strong profitability and which was offset by higher inventory requirements based on our bill plans for Q2. CapEx was $3 million for Q1, which resulted in positive free cash flow of $268 million versus negative free cash flow of $17 million last quarter. We have $50 million remaining under the authorized buyback program, which expires on January 31, 2024. The closing balance sheet cash position was $543 million, while bank debt was $146 million, resulting in a net cash position of $397 million, up from a net cash position of $150 million last quarter. We generated $271 million in operating cash flow and then paid down debt by $141 million in Q1. Turning to the balance sheet and working capital metrics compared to last quarter, The Q1 cash conversion cycle was 86 days versus 77 days in Q4. Days of inventory increased by 16 days to 91 versus the prior quarter of 75 days as we built inventory for a seasonally strong Q2. Days sales outstanding was up by five days quarter over quarter to 43 days, while days payable outstanding increased by 12 days to 48 days. Now, turning to the outlook, we remain enthusiastic about our diversified business model, covering a wide range of GPU, AI, core computing, storage, 5G telco edge, and IoT solutions. We expect a seasonally strong Q2 and are carefully observing the global macroeconomic situation and continuing supply chain constraints, especially for leading AI platforms. For the second quarter of fiscal 2024, ending December 31, 2023, we expect net sales in the range of 2.7 to 2.9 billion, gap diluted net income per share of 375 to 424, and non-gap diluted net income per share of $4.40 to $4.88. We expect gross margins to be similar to Q1 levels, GAAP operating expenses are expected to be approximately $191 million and include $49 million in stock-based compensation expenses that are not included in non-GAAP operating expenses. The outlook for Q2 of fiscal year 2024 fully diluted GAAP EPS includes approximately $40 million in expected stock-based compensation expenses, net of tax effects of $13 million which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to be a net expense of approximately $8 million. The company's projections for Q2 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 15.7%, a non-GAAP tax rate of 17.1%, and a fully diluted share count of $57.6 million for GAAP, and 58.3 million shares for non-GAAP. We expect CapEx for the fiscal second quarter of 2024 to be in the range of 21 to 23 million and a range of 105 to 115 million for the fiscal year 2024. For the fiscal year 2024, which ends June 30, 2024, we are raising our guidance for revenues from a range of $9.5 to $10.5 billion to a range of $10 billion to $11 billion.
spk04: Michael, we're now ready for Q&A.
spk12: Thank you.
spk11: At this time, I'd like to remind everyone, in order to ask a question, please press star 1. We kindly ask that you limit yourself to one question and one follow-up. Our first question comes from Ananda Barua with Loop Capital. Your line is open.
spk09: Hey, yeah, good afternoon, guys. Thanks for taking the questions and congrats on the strong and ongoing execution. I guess, yeah, just so a couple to start. Charles, can you talk about the degree to which you guys – either are benefiting or anticipate the benefit from the increased NVIDIA supply that was pointed to China, but now needs to find other places to go. And to the degree you think you might benefit, if you could give us some sense of, you know, at what rate that benefit makes its way, you know, out of China and into other countries. And then I have a follow-up. Thanks.
spk05: Thank you for the question. Again, it's a complicated situation. But at this moment, we believe December quarter supply from NVIDIA will be much better than last quarter. And that's one of the reasons why we are able to fulfill more percentage of customer demand. And that's why we say 2.7 to 2.9 billion should be our target. So, basically, the supply condition has been improving.
spk09: That's actually really helpful context. I appreciate it. And then I guess, you know, sort of dovetailing from that, Charles, so the midpoint of the implied guide for the fiscal year, the RAISE guide, 10 and a half, implies that the March quarter and June quarter would also be about $2.8 billion, which is the midpoint of your December quarter guide. And then you also, though, made mention of growth accelerating. And it seems like supply is getting better. You also have co-op capacity coming on going into the year. So I guess the question is – Is there conservatism built in into even the implied school year guide that's been raised? Or is there some pull forward in December quarter that you think might be challenging to duplicate in the March and June quarter? It seems like conservatism, but just wanted to check that. Thanks.
spk05: Thank you. Again, we continue to gain lots of design wins So our pack order has been growing faster than what we forecast in reality. So at this moment, 2.7 to 2.9 billion for December should be a very conservative number. And for our whole fiscal year, 10 billion to 11 billion, again, should be a conservative number. So I feel very optimistic to continue to grow quickly. And that's why we continue to grow our REC scale, including the difficulty REC scale rather than production capacity. Likewise, as I shared before, we have 4,000 REC per month capacity, and now pretty much we will grow to 5,000 REC per month capacity. So we are very optimistic for future growth.
spk11: Our next question comes from George Wang with Barclays. Your line is open.
spk10: Hey, guys. Hey, Charles. Thanks for taking my question. Maybe you could give some color in terms of the allocation from other suppliers and partners, kind of for maybe in the near term, kind of for the future, like the AMD MI300, which is expected to launch in the first quarter 2024, and also Aside from H100 from the NVIDIA, any other upside when the L40S from NVIDIA is renting? Just curious, and also including Gaudi from Intel. Maybe you can give some color allocation from additional suppliers.
spk05: Yeah, thank you for the question. Yes, I mean, as you know, we have a very strong NVIDIA product line, including the L40S, and including the CG1, CG2 on the way. And AMC, MI300X, also are getting ready. And India Gaudi 2 is ready to volume production. So overall, we have very good demand and very strong supply capacity. So again, I feel very optimistic for a quick growth.
spk10: Okay, thanks. I have a quick follow-up if I can. Just in terms of when Malaysia coming out and also in the future kind of Taiwan facility, any thoughts on the kind of impact to the profit margin and kind of obviously with the much lower labor cost, can you kind of quantify, maybe give some color just on expecting operating margin accretion going forward? Yes.
spk05: I mean, that's why I just share our utilization rate for US and Taiwan capacity. Today, only about 60%. So when we have a higher utilization rate, our overall cost will be lower. So that's why when we grow revenue, our profitability will increase. And Malaysia, as you know, is a low-cost campus. So once we start production in Malaysia, our cost will be better. and profit margin will be slightly improved.
spk11: Our next question comes from Janet Wing with Susquehanna Financial Group. Your line is open.
spk13: Yes, it's actually . Thanks for taking my question. Midpoint of the December quarter guide implies 57% year-over-year growth, but operating margin declining by about 100 basis point. I understand utilization rate is in the 60% range, but as you bring up utilization rate, how should I think about the OPEX and the leverage from here on?
spk08: Yeah, so we expect that we will continue to get operating leverage Um, Maddie, uh, we, uh, we were, I think a little conservative in our, in our guide for OpEx, uh, in, uh, in Q2. So we, uh, and as we were in Q1, and so we came in a little bit, we came in a little bit lower. We're doing everything we can to do that in Q2 as well. Um, so actually you're up to your operating guide question. You know, we came down a little bit on gross margin year over year, as you know, um, but, uh, We expect, as Charles mentioned, we expect some gross margin leverage as well as operating margin leverage as our operating expenses never increase at the rate that our revenues are.
spk13: Thank you. And Charles, a big part of your COGS is memory and other components. Everything we have heard from memory manufacturers suggests that they're not going to sell at prices that were prevalent just a couple of months ago. So memory prices are going up. And how do you alleviate that inflationary trend to be able to expand margins?
spk05: Thank you. I mean, basically, we are able to pass through our cost to customers. So for that portion, basically, we are of okay, we won't be impacted by that.
spk04: At least it won't be impact too much.
spk11: Our next question comes from John Tenning with CJS Securities. Your line is open.
spk01: Hi. Thanks for taking the question, guys, and great quarter and a nice outlook. Just wanted a little more color on the gross margin guidance and outlook. I mean, I assume you're getting better margins in utilization and on your new facilities on the ramp. Are you simply planning to give all that back with the share gain initiatives and the hyperscale mix? Or is it some input cost component and kind of when should we expect the timeframe for gross margin leverage to really become apparent? Is it only with the new facilities or can that happen a little sooner than that?
spk08: Well, it's a combination, John, of as we ramp revenues up, We're going to get leverage on the gross margin because, as Charles mentioned earlier, we're going to get higher efficiency and factory throughput, which will lower costs as we put more through the factories. So we'll get some benefit there. We'll also get benefit as we transition more manufacturing over to Malaysia and Taiwan. And I think that, so that's why right now we are, although, you know, very competitive situation, we're maintaining our margin guidance for Q2.
spk05: Yeah, I can add a little bit, some kind of, I mean, kind of our sort of way of business growing, our service, including on-site deployment, all those will help our gross margin, our value. So at this moment, We should be on the right track, healthy direction.
spk01: Got it. Okay. And then just a question on the, I think you said you're building seven new buildings here in the U.S. I know you're expanding and looking for places for facilities in North America. Would those all be margin accretive or neutral or negative just given the higher costs here? How do we think about those facilities and their impact?
spk05: Very good question. Indeed, we are adding some more buildings in the Bay Area, and most of those will be rental buildings because our growth is faster than what we can build a building. So it will be a rental facility. And then I did mention about we are looking for another location, hopefully in a little bit of a coastal state in North America. So we are planning for building a new campus in we will decide next few months i believe but uh short-term view building in silicon valley will be rental property our next question comes from nahal chokshi northland capital markets your line is open uh yeah thank you um you may have already addressed this but
spk03: What are your expectations for AI revenue contribution with respect to the midpoint of December quarter guide being up 32% Q2Q?
spk07: Yeah, so I think we're expecting really the same performance, Nehal.
spk08: We'll expect it to be in a range over 50%. Okay.
spk05: can you give a little bit more precise number as far as what the exposure was in the september quarter other than greater than 50. um that's um that's we're giving that that approximate figure um and that's uh that's our guy yeah basically ai uh revenue percentage continues to grow but hopefully uh in a healthy and consistent way
spk11: Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.
spk00: Yeah, thanks for taking the question and also congrats on the quarter. I'm just curious, going back to the supply side of the discussion, how would you, as you're engaging with customers and thinking about their build-out plans in their data center footprints for AI, how would you characterize the evolution of lead times? on these higher-end GPUs? I mean, you know, relative to what it was maybe, you know, 90 days ago. How has that evolved, and how are you seeing that evolve into the current quarter?
spk05: Yes, it's a complicated job. However, because our building power solution and our global footprint together, we have a huge scale. We support hundreds of customers. So it's all prospecting. Indeed, relatively, we are able to take care of the allocation, the lead time, the inventory control, product pulling, more efficient than our competitors. And we are continuing improving in that area.
spk00: So you would say that lead times have improved throughout this course this last quarter, and you expect that it sounds like to continue improving in the December quarter is kind of a fair characterization?
spk05: Yes. And that's why our inventory utilization rate will be improving. So before, I guess we have about 90 days turnaround time. Yes. And I guess that will be improved when the scale continues to grow. And when we continue to leverage our bidding box solution, situation will continue to improve.
spk03: Yep.
spk00: And the follow-up question would be, as the market evolves more competitively, and you see, I know a prior question on the MI300, you've got the Gaudi silicon. I guess the way I think about it is these customer deployments are longer cycle. It's not like these decisions are made in a given quarter. So as we look to these products, particularly the MI300s, x ramping you know really starting early part of next year and through the course of next year are those projects that you're already seeing visibility into and and that actually adds another layer of growth uh to to to the to the pipeline are those projects that you've already been designed in and you're just waiting for those products to kind of launch to to really start to see that incremental revenue for for those competitive offerings
spk05: Yeah, Alan, you are right. Because our building power solution, so we are able to design and make a new technology available earlier than the market, basically. So usually we send our solution to customer for evaluation so our customer can make a decision earlier. And that allows Shibu Michael a little bit earlier time to prepare the product, prepare the inventory. So it doesn't matter if it's a media solution, AMD solution, or India solution. We provide a simply broad solution, and we gain time-to-market advantage. We provide a customer earlier seeding, earlier system so that they can validate in advance.
spk12: This will conclude our question and answer session and our conference call today. Thank you for joining us. You may now disconnect.
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