Super Micro Computer, Inc.

Thank you for standing by. My name is Cole, and I'll be your conference operator today. At this time, I would like to welcome everyone to Supermicrocomputer Fiscal Second Quarter 2024 Results. With us today, Charles Liang, Founder, President, and Chief Executive Officer, David Wicken, CFO, and Michael Stager, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speaker's remarks will be a question and answer session. If you'd like to queue for a question, please press star one on your telephone keypad. It has been asked that we keep ourselves to one question and one follow-up question. And with that, I'd like to pass the call over to Michael Steger.

Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the second quarter, which ended December 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 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 third quarter of fiscal year 2024 and the full fiscal year 2024. 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 2023, and our other SEC filings. All of these documents are available on the investor relations page of Supermicro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the company presentation or the 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 will have a Q&A session for sell-side analysts to ask questions. I'll now turn the call over to Charles.

Thank you, Michael, and good afternoon, everyone. I'm delighted to share our second quarter results, which show a record-breaking performance for Shibu Michael. We achieved revenue of $3.66 billion, a 103% increase from last year. and earnings per share of $5.59. This is our first quarter ever with over $3 billion revenue. More importantly, this single quarter revenue surpassed our annual revenue for 2021. This fantastic quarterly result was driven by strong demand and improving supply conditions. for GPU and related key system components. Our RackScale product and player IT and AI total solution continues to gain more new customers, along with their competence in Supermicro as their go-to infrastructure partner. Our AI RackScale solutions, especially the deep learning and LLM optimized based on NVIDIA HGX-H192 continue gaining high popularity. The demand for AI-influencing systems and mainstream computer solutions have also started to grow. The exciting news is that finally we are entering an accelerating demand phase from many more customer wins. We support, to support faster growth, we have increased our working capital recently by raising about $600 million with an equity offering. Moreover, we have other programs to increase our cash flow without additional equity to support short and long-term sustainable growth. Overall, I feel very confident that this AI boom will continue for another many quarters, if not many years. And together with the related inferencing and other computing ecosystem requirements, demand can last for even many decades to come. We may call this an AI revolution. Let's go over some key financial highlights. First, fiscal Q2 net revenue total $3.66 billion, up 103% year-on-year and up 73% quarter-on-quarter, exceeding the top end of our original guidance of $2.9 billion for December quarter. Second, fiscal Q2 non-GAAP earnings of $5.59 per share were well above $3.26 a year ago and exceed the guidance range of $4.40 to $4.88, all demonstrating continual strong operation leverage. Economic scale is important to us for continual strong growth. Supermicro is at a forefront of the AI revolution, where the pace of innovation is accelerating. We are heading the race by developing the most innovative AI infrastructure on many platforms at a large scale for almost any industry and for any market vertical. As the market leader, we have been preparing more than double the size of our current AI portfolio, which is the Commision, NVIDIA, CG1, CG2, Boris Harper, Superchip, H200, and B100 CPUs, GPUs. And over here is InfantSIM Optimized GPUs, AMD MI300X, MI300A, and Intel Gaudi 2 and Gaudi 3. All these new platforms will be ready for high-volume production in the coming months and quarters. Moreover, we are adding further optimized new architectures for our coming NVIDIA GPU product lines. Our AMD MS300X system is sampling now, and our Intel RTX 3.0 system is coming soon. More importantly, we are continuing to invest and innovate in data center and enterprise liquid cooling technology to make sure these high-power AI platform are in line with our green computing methodology while improving the performance, efficiency, and reliability of system in a data center. As a total IT solution innovator, manufacturer, and provider, More and more of the major deployments has been delivered as an integrated RAC solution, particularly for the AI cluster deployments. Service, networking, storage, security features, and software are optimized, validated, delivered, and serviced as an integrated RAC cluster from Shibu Mako's manufacturing facility worldwide. Leveraging our building block architecture and operating production automation system, we can deliver optimized rack solution with come-to-market and quality advantages for our customer more efficiently than competition. Our TTP, come-to-delivery factor, have been in continuous improvement. By this June quarter, we will have high-volume dedicated capacity for manufacturing 100kW to 120kW rack with liquid cooling capability, providing DLLC, direct attached liquid cooling rack capacity up to 1,500 racks per month. And our total REC production capacity will be up to 5,000 RECs per month by then. At the same time, our high-volume clean room REC scale production facility will be ready to service critical customer relations. The rapid growth of our business is driven the need of additional R&D, solution optimization, manufacturing, and service capacity. Today, our production utilization rate is about 65% across our USA, Netherlands, and Taiwan facilities. And they are quickly finished. To address this immediate capacity challenge, we are adding to new production facilities and warehouse near our Silicon Valley headquarters, which will be operating in a few months. The new Malaysia facility will focus on expanding our building blocks with lower cost and increase volume, while other new facilities will support our annual revenue capacity above $25 billion. To summarize, our record quarterly performance demonstrates our building block, right scale, plug and play IT and AI industry leadership, which continues to accelerate and shows line of strong market share gains. The continued strength of existing customer build and ramp of newly acquired customers. and a robust pipeline of new product coming in 2024, giving me confidence that fiscal Q3 revenue will be in the range of $3.7 billion to $4.1 billion. Additionally, we are expecting continual strength for the second half of fiscal 2024 and now forecast revenue for the full fiscal year ending in June to be in the range of $14.3 billion to $14.7 billion. We are in overdrive to accelerate Supermicro 3.0 business model with this AI boom. In the meantime, we are preparing ourselves for the next phase of Supermicro business growth with Supermicro 4.0 and its expanding team. Now is certainly the most exciting time yet for Supermicro. Before passing that code to Debbie Wiggin, our CFO, I want to thank again to our partners, our customers, our super micro employees, and our shareholders for your strong support. Now, let me pass to our CFO, Debbie, for more financial details.

Thank you, Charles. Fiscal Q2 2024 revenues were $3.66 billion. up 103 percent year over year and up 73 percent quarter over quarter. Revenues were higher than our initial guidance of 2.7 to 2.9 billion and slightly above our recently updated guidance of 3.6 to 3.65 billion. Our growth was driven by demand from new and existing customers for our leading AI and rack scale total IT solutions and an improving supply chain. Next-generation AI and CPU platforms continue to drive strong levels of design wins, orders, and backlog from top-tier data centers, emerging cloud service providers, enterprise channel, and edge IoT telco customers. During Q2, we recorded $1.48 billion in the enterprise channel vertical, representing 40% of revenues versus 43% last quarter. This was up 55% year-over-year and up 62% quarter-over-quarter, driven by enterprise AI and CPU upgrade programs. The OEM appliance and large data center vertical revenues were $2.15 billion, representing 59% of Q1 revenues versus 55% last quarter. It was up 175% year-over-year and up 83% quarter-over-quarter. Two existing CSP slash large data center customers represented 26% and 11% of total revenues for Q2. Emerging 5G telco edge IoT revenues were 35 million, or 1% of Q2 revenues. Growth was driven by AI, GPU, and rack scale total ICT solutions, which again represented over 50% of total revenues this quarter with AIGPU revenues in both the enterprise channel and the OEM appliance slash large data center verticals. Server and storage systems comprised 94% of Q2 revenue, and subsystems and accessories represented 6%. ASPs increased on a year-over-year and quarter-over-quarter basis, driven by product and customer mix. By geography, The U.S. represented 71% of Q2 revenues. Asia, 18%. Europe, 8%. And the rest of the world, 3%. On a year-over-year basis, U.S. revenues increased 139%. Asia increased 98%. Europe decreased 8%. And the rest of the world increased 67%. On a quarter-over-quarter basis, U.S. revenues increased 61%. Asia increased 191%. Europe increased 51 percent, and the rest of the world increased 37 percent. The Q2 non-GAAP gross margin was 15.5 percent, which was down quarter over quarter from 17 percent as we continued to focus on winning strategic new designs and gaining market share. Turning to operating expenses, Q2 OPEX on a GAAP basis increased by 6 percent quarter over quarter, and 58% year-over-year to $193 million driven by higher compensation expenses and headcount. On a non-GAAP basis, operating expenses increased 18% quarter-over-quarter and 41% year-over-year to $153 million. Due to non-GAAP operating margin was 11.3% versus 10.8% last quarter as we benefited from operating leverage driven by higher revenues. Other income and expenses for Q2 was a net expense of approximately $16 million, consisting of $8 million in interest expense and a loss of $8 million principally from foreign exchange. Interest expense increased sequentially as we drew down on short-term bank credit facilities for working capital during the quarter. The tax provisions for Q2 was 61.5 million on a GAAP basis and 71.1 million on a non-GAAP basis. The GAAP tax rate for Q2 was 17.3 and the non-GAAP tax rate was 17.8. Q2 non-GAAP diluted EPS of $5.59 exceeded the high end of our initial guidance of $4.40 to $4.88 and slightly above our recently updated guidance of $5.40 to $5.55 due to operating leverage. Cash flow used in operations for Q2 was $595 million compared to cash flow generated by operations of $271 million during the previous quarter. Strong profitability and a higher level of accounts payable was offset by higher inventory and accounts receivable due to build plans for Q3 and the timing of shipments during Q2. CapEx was $15 million for Q2, resulting in negative free cash flow of $610 million versus positive free cash flow of $268 million last quarter. During the quarter, we executed an equity offering and raised approximately $583 million in net proceeds after underwriting discounts and other issuance costs from the sale of 2.3 million shares at a price of 262 per share. The proceeds will be used to strengthen our working capital, enable continued investments in R&D, and expand global capacity to fulfill strong demand for our leading platforms. The closing balance sheet position was 726 million, while bank debt was 376 million, resulting in a net cash position of $350 million versus a net cash position of $397 million last quarter. Turning to the balance sheet and working capital metrics compared to last quarter, the Q2 cash conversion cycle was 61 days versus 86 days in Q1. Days of inventory decreased by 24 days to 67 days versus the prior quarter of 91 days due to the timing of shipments during the quarter. Days sales outstanding was down by 14 days quarter over quarter to 29 days, while days payables outstanding decreased by 13 days to 35 days. Now, turning to the outlook, we expect a strong March quarter as we continue to gain momentum with new and existing customers for our AI and rack scale total IT solutions. For the third quarter of fiscal 2024, ending March 31, 2024, we expect net sales in the range of $3.7 billion to $4.1 billion. GAAP diluted net income per share of $4.79 to $5.64, and non-GAAP diluted net income per share of $5.20 to $6.01. We expect gross margins to be slightly lower than Q2 levels. GAAP operating expenses are expected to be approximately 201 million and include 39 million in stock-based compensation expenses that are not included in non-GAAP operating expenses. The outlook for Q3 of fiscal year 2024 diluted GAAP EPS includes approximately 28 million in expected stock-based compensation expenses, net of tax effects of 14 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 $9 million. The company's projections for Q3 GAAP and non-GAAP diluted net income per share assume a GAAP tax rate of 13.8 percent, a non-GAAP tax rate of 15.8 percent, and a fully diluted share count of $60.1 million per GAAP and $61 million for non-GAAP. We expect CapEx for Q3 to be in the range of $18 to $21 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 $10 to $11 billion to a range of $14.3 to 14.7 billion. Michael, we're now ready for Q&A.

If you'd like to queue for a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by 2. Again, to join the queue for a question, please press star 1. It's also been asked to keep yourself to one question with one follow-up question. We'll pause here briefly as questions are registered. Our first question is from George Wang with Barclays. Your line is now open.

Hey, guys. Congrats on the quote and a strong guide. I have two questions. Firstly, can you talk about kind of supply versus demand? You know, obviously for the December quarter, probably driven by both kind of improving supply and also strong demand. So if you can, maybe you can talk about backlog level and also on the supply side, are there still ongoing constraints right now?

Yeah, thank you for the question. Indeed, the demand is still stronger than supply. So if we have more supply, we will be able to ship more. We are very happy to continue to grow our capacity, work out better, even higher support, so to grow business even quicker.

Okay, thank you. And, you know, quickly a follow-up just on the liquid cooling. You know, you talk about kind of expanding to 1,500 rack. for months after June this year. And maybe you can talk about your expectation for the total production mix from liquid cooled racks by the end. And also maybe you can, you know, talk about kind of the difference so they, you know, the config within the liquid cooling. I know you guys have some emotion cooling and the air to liquid cooling. So maybe you can double click on this thematic topic going forward.

Thank you, George, for the question. Indeed, liquid cooling, we are leading the industry. So, we have a huge capacity already and have a very mature total solution ready. But lots of customers already like liquid cooling, but their data center needed some more time to be ready. I mean, their infrastructure needed some more time. So, we believe liquid cooling will be the trend, and we continue to make ourselves ready and try our best to support the customer, including providing some help to their data center infrastructure. So I believe liquid cooling percentage will continue to grow, but at this moment, most of the shipping is still air-cooled.

Okay, great. Thank you. I'll go back to the queue.

Thank you. Our next question is from Sameek Chatterjee with JP Morgan. Your line is now open.

Hi. Thanks for taking my questions, and congrats on the strong results here. Maybe if I can just start with the gross margin, and you did have a step down here in 2Q. You're guiding to a slight moderation to 3Q. Maybe just help me understand, as a management team, how do you think about balancing the opportunities that you're going for in terms of market share wins and design wins relative to sort of being growing profitably over the long run, how you sort of evaluating those opportunities side by side, and then have a follow-up. Thank you.

Sure. Thanks, Sameek. So, when we win a new customer, we always, you know, try to go in and out. And so, we go into the organization and try to spread out into different divisions. And so in order to do that, as we take on new customers, we do evaluate and try to win the business, which requires us to be competitive. And so we always are balancing, in the interest of shareholder value, how to maximize that. And so at this time, you know, we are growing really quickly. And in order to do that, in order to take market share, we will take opportunities by, you know, by being more competitive on pricing.

The good thing is that when we continue to grow our economical scale, the operation margin indeed will be still able to keep in a healthy position.

Yeah, got it, got it. When I look at the revenue guide for 3Q and 4Q, there's a step up here in revenue of about half a billion, a bit less, going from 2Q to 3Q, and then a bigger step up to get to the midpoint of the annual guide into 4Q. How much of that is driven by just being a bit more cautious about when supply comes in and pushing the revenue guide a bit more to the 4Q? Is that really what the visibility currently tells you in terms of supply? I'm just trying to get sort of what's driving the cadence from 2Q to 3Q to 4Q and the guide that you provided today. Thank you.

Yeah. So, Sameek, we have a very large and growing backlog, which grew again this quarter. And so, really, as Charles mentioned earlier, our only constraint is supply. However, the good news is that supply is improving. And so to your point, we have to be somewhat conservative because we are constrained still by supply. Thank you. Thanks for taking my questions.

Our next question is from Nahal Chachi with Northland. Your line is now open.

Yeah, thanks, and great, impressive guidance, and thanks for that explanation regarding the dynamic on the forward guidance for both March quarter plus the June Q guide. Looking at the incremental revenue for December quarter, Dave, you already alluded to this. You're making shareholder-accretive decisions. So that's what's driving the tickdown in the gross margin, yet your operating margin has improved Q over Q. And so just to be clear, when you're talking about making shareholder accretive decisions, it's still with respect to current revenue, not just simply looking at future free cash flows associated with future revenue follow-on from these lower margin opportunities. Is that correct?

It's really about trying to return the most shareholder value. So back to your point, we know that because of our our tight control over operating expenses, if we get more volume from a large customer, we're going to be able to bring more EPS to our shareholders. So that's really the – it's really the decision to partner with a really good customer.

Got it. Okay.

And then did you review the 10% revenue customers for the quarter? We did. Yeah, we said we had two – 125 and 111, both in the CSP large data center vertical.

Great. Thank you for taking my question. I'll get back in the queue.

Our next question is from John Tanwintang with CJS Securities. Your line is now open.

Hey, good afternoon. Thank you for taking my questions and really congratulations on the fantastic growth. Charles, my first question is for you. I was wondering what gives you the confidence in the growth beyond this year? You mentioned inference, the ecosystem, potentially years and decades of demand. Where is the visibility coming from? What are you seeing in your backlog, in your order books, and in your conversations with customers that take you to that confidence?

Yeah, thank you for the question. Yes, I mean, other than generative deep learning segment continue to grow very strong, our influencing opportunity and general CPU customer base also growing. So with AI continue to be more popular indeed, so many vertical around the world need more influencing solution as well, including private cloud, private kind of data center, and even personal AI. So we approaching continue to grow in all kind of direction, and we see positive feedback, feedback.

Got it. And to ask another question that's been mentioned in a different way, is there a gross margin floor as you pursue this share gain, and when do you see a possible inflection? I'm just wondering, what is the limit when you go, you know, in terms of gaining share versus the margin that you're generating?

Sure. So, we set out a target back in March of 2021 of 14 to 17, and we've actually done pretty well against that target. But one thing I'll say is that there's a lot of initiatives that play into our favor. Number one, we're doing a lot in terms of expansion to lower our cost envelope. And number two, our advantage is our building block solutions. And what that means is we're the fastest to market because of the way that we have architected our products. So what that means is there's a lot of new technologies that are coming out from many different technology providers and we expect to again as we were with AI be first to market with those and that first to market advantage helps us helps to differentiate ourselves as we come out with a complete set of solutions so we think that's another thing that will that is always going to play to supermarkets advantage yeah especially we have a so broad bidding product solution

So the economic of scale will help our building block solution to be more efficient because there are lots of product line. Our volume was still in the middle size to small size of volume. And we deserve and will continue to be aggressive to grow, to see every segment, every vertical, we have a healthy economic of scale.

Okay, great.

Thank you.

I will jump back in queue.

Our next question is from Quinn Bolton with Needham. Your line is now open.

Thanks for taking my question. Let me echo the quick congratulations on the very strong results. I guess I wanted to ask you a gross margin question too. Obviously, it's moderated here in the current quarter and in the forward quarter. as you guys, you know, position yourselves for further market share gains. I guess my question is, you know, would sort of the midpoint of that 14 to 17 percent level that you set back in 21, is that sort of the right level to be thinking about as you guys stay aggressive and try to drive market share gains? And maybe a sort of a twist on the question, you know, to the extent that, you know, supply catches up to demand, and growth rates slow, would you then start to focus more perhaps on higher margin business? Just any sort of thoughts where in that 14% to 17% range margin may trend over the next year or two would be helpful.

Yeah, for sure. Our most important principle is why would a base go for shareholders? for a company. So although we set a 14% to 17% as the range in 2021, but if any change, any further adjustment will be the base of a shareholder, we will do that change. And we are carefully evaluating the range kind of monthly.

Got it. Charles, a question on liquid cooling, just as you look forward. You guys are ready. It sounds like the infrastructure may still need some improvements, but I guess as you look at data center customers, CSPs that are looking to deploy liquid cooling, does that include current generation sort of 700-watt GPUs, or is it really the next generation, the B100s and sort of the 1,000-watt GPU class that really drives the adoption at your CSP customers, you know, drives that need for liquid cooling?

You are right. In the current 600, 700-watt module, people can still take care very well with the air condition. And that's why people are still comfortable with the traditional air cooler. But when the system grows to 1,000 or even more than 1,000 watts per module, yes, I mean, electric cooling becomes even much more critical. So by that time, I believe most of the data centers will have facilities ready for that. So we are very optimistic and very patient. to continue to improve our quality, especially the readability and easy for maintenance. So when customers are ready, we can quickly to support them. Excellent.

Thank you.

Thank you for the question.

Our next question is from Aaron Rakers with Wells Fargo. Your line is now open.

Yeah, thanks for taking the questions and also great results. Just curious, when you talk about your customer concentration and the diversity of the business, when you talk about 26% and 11% of your revenue coming from two customers, are those the same customers? Like last quarter, I think you had a customer that was 25%. Or are you seeing these customers kind of bounce around? I guess the simple question is just, is that the same customer, that 26 versus 25%?

So, Aaron, the 26% customer is the same customer, but the 11% customer is not a new customer, and it's a longer-term customer, but first time in 11%. And to your point, yes, we do see a bouncing in and out, and we're very happy, you know, anytime they do bounce above, by the way.

Yeah, and that's why the economic scale is very important to us. When we further grow our total revenue, we will have a more large-scale customer and more middle-sized and small-sized customers as well.

Yeah, and then as a quick follow-up, I'm just curious, as we look at the AI kind of evolution from here, there's a lot more kind of product diversity itself coming out, you know, B100s, GH200, AMD's product lineups. As you think about the growth going forward, would you say that the growth is more ASP expansion-driven as we think about these next-generation platforms, or does diversity drive more of the growth being driven by unit volume growth? I'm just curious on how you would kind of characterize the growth driver from here going forward on those two inputs.

I guess in the next few years, our growth will be quicker in terms of unit number. So the volume growth will be quicker than ASP. Because the last two years, our ASP has been growing a lot, right? So next step, I guess, unit number, volume will grow faster.

Thank you. Our next question is from Anada Barra with Loop Capital.

Your line is now open.

Yeah, good afternoon, guys, and thanks for taking the question. Appreciate it. And congrats on the really solid execution. Yeah, congrats on that. I guess, yeah, too, if I could, Charles, Maybe a clarification. I did some math on the 15,000 rack per month, and I came up with, you know, I guess 5.6 billion a quarter. Call it five and a half, I guess, plus or minus, but I count the 5.6 billion. Is that kind of accurate? And I guess the question is, if it's sort of mid-year, you're talking about getting to that point, Is that the kind of run rate opportunity that we can be thinking about quarterly? And not like a guidance, but like an opportunity when you get into sort of the back half of the calendar year. Just want to make sure that we're interpreting that, you know, kind of accurately. And I have a quick follow-up. Thanks.

Yeah, again, we say we have to make a green computing everywhere. That's why, whenever we can have customer base, we will. That's why we have been building a really large-scale capacity for liquid cooling and other green computing solution. So, yes, the capacity will be huge, but it's a capacity there when customer need, we are ready. And indeed, our facility also very flexible. Lots of facility can support liquid cooling and air cool or combination cooling. So yes, we have a huge capacity ready for growth, but not necessarily all for liquid cooling. They support air cool or combination hybrid cooling as well.

Awesome. Awesome. Thanks for that. And then could you just, I guess the follow-up is you guys have mentioned a couple of times on the call today, you know, sort of new customers as part of, and I think, I think Charles, your, your words were accelerated growth. And so any, any complexion, I guess any, you know, sort of any context on, on the new customers that you guys are wrapping in to, you know, into your runway, you know, kind of would be useful. Anything about them, like what it, you know, kind of industries, I guess like sort of industries, projects, you know, anything like that would be helpful for us to do. Thanks.

Thank you. I mean, we spend a lot of effort to make our sales process and operations process. service process be automatic. So those automation systems for sales, for production, for support really enlarge our capacity. And that's why we have a capacity to approach to support more customers now. And we need an economical scale because economical scale is very important to our operation margin and overall EPS. Yes, we are ready to grow much quicker even.

Yeah, that's super helpful. Okay, guys, thanks a lot. Congratulations.

Thank you.

Our next question is from John Tan-Wen Ting with CGS Securities. Your line is now open.

hi thank you for the follow-up i was just wondering if there's any changes to your opex growth formula it's been you know on a trailing basis uh you know less than half of what revenue growth is you know as you as you grow bigger and you expect to run uh against any limits in supporting such a large you know customer base and potential customer base or are you getting more economies of scale as you are larger with that yeah indeed uh we have been uh uh

a small-volume company for too long, a 30-year-old company. So our volume just started to grow in a kind of good economic scale just recently. And we like to take this chance to continue to grow our economic scale. So when our economic scale grows, we leverage automation system, again, for sales, for operation, and for service. And that's why, I mean, we are in a good position continue on growing quickly.

Okay, great. And I was just wondering, at the rate of growth that you're seeing, do you expect to need more external financing? I know you talked about other sources of cash. I'm just wondering if you're going to the debt markets, what the plans are to finance this growth?

Yeah, our financial team have been very diligent in working out more source, especially try to minimize dilute our stock, our equity. So we have a minimum program kind of well-studied and ready there. So when we need more capital, we are ready. David, you may add something.

Yeah, so I'll just echo what Charles said. We're looking at a number of different things, John, and, you know, but we are mindful of not having further dilution, as Charles said. So we're looking at a number of different opportunities. And the reason we have to is because we need more working capital for growth. And the reason that our cash flows were not as strong as last quarter was simply because we grew by so much. So when you grow by over a billion dollars in a quarter, you've got to have additional working capital. So that's a plain and simple fact.

Our inventory has been growing more than $1 billion. Yeah. And we're continuing to grow.

Got it. Thank you very much.

Our last question will be from Nahal Chakshi with Northland. Your line is now open.

Yeah, great. Thanks for the follow-up question. And I actually have two follow-up questions. First, at the September quarter earnings call, I believe you guys said the capacity was around $18 billion. That's up from $15 billion to June 2023 quarter. Was the driver of that actually increased capacity or increased ASPs? And then in relation to that, your full year guidance, That implies a June 2 guidance of around $4.7 billion. That implies that your annualized capacity has reached $19 billion. And so as your capacity is increasing, is this largely a mix-driven, like-for-like ASP-driven, or has your capacity actually gone up prior to Malaysia coming online?

Yeah, I mean, our ASP will gradually continue to grow. While the unit number will grow much faster from now on, I guess. So that's why we need more capacity.

One thing I'll add, Namho, is that in December, we shipped over 1.7-1.8 billion. And so that alone establishes a $19 billion Okay.

And then my other question is that typically going into March quarter, revenue is seasonally down Q2Q, guiding it up to Q2Q. Usually, though, when the revenue is down seasonally quarter to quarter, your cash conversion cycle goes on a Q2Q basis. This March quarter, Howard, because you're projecting a QQ revenue increase, does that change your expectations on cash conversion cycles, seasonality dynamics?

Yeah, because of that demand, it is very strong. So we believe this March quarter will be a strong quarter as well.

David, did you have anything to add to that?

Yeah, so it really comes down to timing, you know, when we receive inventory and when we ship out. So, you know, as I mentioned in the December quarter, you can have big, you know, you can have a big activity even within a month within the quarter. And so that will affect, you know, that will affect your metrics.

Okay. Talking about the December quarter, your cash conversion cycle was actually a lot better than what we had expected. And, yes, I recognize there was a consumption of cash, but it was at least a lot better than what we had expected. Was that actually better than what you had expected, given the significant revenue upside that you had delivered here?

It absolutely was, yeah. Yeah, we had some customer prepayments and things which helped us out.

Yeah, also, when economic scale –

When economical scale grow, we can more efficiently leverage our inventory as well.

Right. OK. Great.

Congrats, guys. Thank you. That concludes today's conference call. Thank you all for your participation. You may now disconnect your line.