Super Micro Computer, Inc.

Thank you for standing by. My name is Tamia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Supermicrocomputer Inc. SNCIUS Q1 FY25 Business Update Call. With us today are Charles Liang, Founder, President, and Chief Executive Officer, David Wiegand, CFO, and Michael Stager, Senior 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 one on your telephone keypad. Thank you.

Good afternoon, and thank you for attending Supermicro's first quarter fiscal 2025 business update conference call for the first quarter, which ended September 30th, 2024. With me today are Charles Liang, founder, chairman, chief executive officer, and David Wiegand, chief financial officer. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. I will make additional remarks prior to the end of the Q&A, But the company will not address any questions regarding the recent decision of our independent auditor to resign in the delay in the filing of the company's 10-K. During today's conference call, Supermicro will address business and market trends from the first quarter of fiscal 25, including our financial outlook and operations, our strategy, technology, and its advantages, our current and new product offerings, and competitive industry and economic trends. We will discuss estimated financial results, but reference to any financial results are preliminary and subject to change based on finalized results contained in future filings with the SEC. By now, you should have received a copy of today's news release that was issued after the close of market and is posted on our website where this call is being simultaneously webcast. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. The discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to those public filings, including our most recent annual report on Form 10-K. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue and cash and investments. This call is being broadcast live on the Supermicroinvestor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and its property, Supermicro. Our second quarter fiscal 2025 quiet period begins the close of business Friday, December 13th, 2024. With that, I'll turn it over to Charles.

Thank you, Michael. Before we dive into the first quarter details, I would like to share some thoughts on recent challenges that the company has experienced. As we have emphasized in our of firing things these challenges emojis we remain confident in our previous financial reports and as previous alarms we are actively in the process of engaging a new auditor we are working with urgency to become current again with our financial reporting i'm pleased to report that the special committee had today provided the following statement to Shibu Manko, which is also included in our press release. I quote, the special committee has completed its investigation based on a set of initial concerns raised by Ernest and Yang. Following a three-month investigation, then by independent counsel. The committee's investigation today has found that the Auditor Committee has acted independently and that there is no evidence of fraud or misconduct on the part of management or the vote of directors. The committee is recommending a series of remedial measurements for the company to strengthen its internal governance and oversight functions. And the committee expect to deliver the full report on the complete work this week for next. The special committee has other work that is ongoing, but expect it to be complete soon. End of quote. The special committee has done otherwise provided any additional details or information. We look forward to receiving the committee's full report in the near future. We do not believe the current challenges affect Supermicro's ability to service our customers and partners as we continue to grow rapidly and strongly with the AI revolution. and my confidence in Supermicro and its staff remains stronger than ever. Here are some key quarterly highlights. The preliminary fiscal Q1 net revenue was in the range of $5.9 to $6 billion. At the midpoint, this is up 181% year on year, driven by strong AI demand from our old and new customers it was one of our strongest first quarters in history despite the many customers are waiting for the communism new generation gpu chips the preliminary physical q1 non-gag earning in the range of 75 cents to 76 cents per share was 31 last year approximately a 122% year-on-year growth rate. The preliminary non-GAAP growth margin approximately 13.3% and non-GAAP operating margin is approximately 9.9%. Both were higher than the previous quarter as customer mix improved and supply chain cost and expertise shipping for DLC components. We have deployed the world's largest DLC AI supercaster with 100,000 Nvidia GPU in the record time to deployment, TPD, as well as time to online. This milestone achievement reflects our engineering expertise and complex logistics capabilities for large-scale AI infrastructure deployment. Leveraging our data center building block solution, DCBDS. We are now building full-scale liquid-cooled data center with our large-scale plug-and-play solutions, featuring our latest DLSE liquid cooling technology at a leading pace. DCBPS, Data Center Building Block Solution, can reduce the time required for customers to build new data centers from roughly two years to a few quarters, significantly improving data center TTB, TTO, time to delivery, and time to online. And of course, for customers' AI, IT infrastructure, Data center building block solution is also helping to accelerate the adoption of DLC liquid cooling, driving efficiency and performance while reduce customers' OPEX, achieving greener computing. We expect 15% to 30% of new data centers will adopt liquid-cooled infrastructure in the next 12 months The DLLC volume is at least 10 times more than last year. I mean, this year, DLLC market share will be at least 10 times more than last year due to the DLLC liquid cooling product maturity and the rapid growth of AI. To keep the DLLC solutions performing at their best, our new super cloud composer, scc is capable of end-to-end management from chip level all the way to rack level and data center cooling towers making it the most powerful dlc data center management software on the market today scc for the simplified provisioning of a highly automated software defined infrastructure supporting customers with rapidly changing workload requirements. With the addition of SCC, Supermicro is well prepared to service many more customers and grow DLLC Deep Recruiting Data Center market share. On the production front, we are in the process of completing our new Malaysia campus. where we expect to begin manufacturing later this quarter. Additionally, we have been nonstop expanding our facilities in Silicon Valley to increase our DLCE liquid cooling large scale production capacity. Now they are hosting 50 megawatt of power and able to produce more than 1,500 DLCE GPU racks per month with plans to scale up for them. Our Taiwan and Europe production facilities also are growing at a quick pace. Moreover, we are planning to expand to several other global manufacturing locations in the near future. By leveraging our strengths in technology, innovation, product design, build quality, supply chain management, deployment, and data center services. We are pushing our goal to transform Simple Micro into a leading USA as well as worldwide AI IT infrastructure company. We are off to a strong start in fiscal 2025. Our total IT solutions deployments are rapidly scaling. And our new product developments are progressing smoothly. Our NVIDIA GP200-NVR72 is ready. And the 10U air-cooled and 4U liquid-cooled B200 rack part and play systems are fully production ready. The brand new 200kW plus super rack architecture co-developed with NVIDIA, which provides near 100% DLC. I mean, the whole rack, almost no cooling fan required. It is also on the right track. The new shipboard rack architecture will be able to achieve power usage effectiveness, PUE, close to 1.0. complete our broad-disk AI portfolio. The AMD MI300 and MI325 platforms and Intel W3 solutions are ready to go as well. Our data center building block solution is attracting more new customers, and our long-term investment in DLLC cooling is paying off with all the cars quality and volume capacity given us a sustainable competitive uh age and economics of scale before passing the code to david wagon our cmo i want to thank our partners customers investors and shibu michael employees and express my appreciation for their patience and support until we can provide more information about our 10K firing status. Our strong foundation. There are central building block solutions and DRC difficulty. Green computing leadership not only reduce energy costs for our customers, but also contribute to a healthier mother earth. I believe we are well positioned for strong future growth.

Thank you, Charles. We remind investors that the unaudited interim financial information in this report is preliminary. We expect unaudited Q1 fiscal year 25 revenues in the range of $5.9 to $6 billion. up 181% year over year and up 12% quarter over quarter versus our guidance of 6 billion to 7 billion. Growth was driven by strong demand for direct liquid cooled rack scale AI GPU platforms. AI contributed over 70% of revenues across enterprise and cloud service provider markets. The expected Q1 non-gap gross margin is approximately 13.3% versus 11.3% last quarter due to product and customer mix and lower costs coupled with higher manufacturing efficiencies on DLC AI GPU clusters. The Q1 non-gap operating margin is approximately 9.9%. excluding $67 million in stock-based compensation expenses versus 7.8% in Q4. The Q1 estimate for other income and expense is expected to be a net expense of approximately $9 million consisting of $17 million in interest expense offset by $8 million in interest and other income. The Q1 tax rate is approximately 14% for GAAP and 16 percent for non-GAAP. The Q1 estimate for GAAP net income is $433 to $443 million, and non-GAAP net income is $483 million to $493 million. Non-GAAP net income excludes $50 million in stock-based compensation expenses, net of the related tax effects of $17 million. The split adjusted Q1 gap diluted earnings per share range is approximately 68 cents to 70 cents versus prior guidance of 60 cents to 77 cents. The Q1 non-gap diluted EPS range is approximately 75 cents to 76 cents versus guidance of 67 to 83 cents. We expect a Q1 GAAP diluted share count of $639 million and a non-GAAP diluted share count of $648 million. Operating cash flow is approximately $407 million, an improvement of $1 billion quarter over quarter. Q1 closing inventory was approximately $5 billion. CapEx for Q1 was $42 million. positive free cash flow was $365 million for the quarter. The Q1 closing balance sheet cash position was $2.1 billion and total debt was $2.3 billion, with bank debt of $0.6 billion and convertible bond debt of $1.7 billion, resulting in an improved Q1 net cash position of approximately negative $0.2 billion versus a net cash position of negative 0.5 billion last quarter. Turning to the balance sheet and working capital metrics compared to last quarter, the Q1 cash conversion cycle was 97 days versus 94 days in Q4. Days of inventory was 85 days compared to the prior quarter of 82 days. Days sales outstanding for Q1 was 41 days versus 37 days last quarter, while days payables outstanding was 29 days from 25 days last quarter. For the second quarter of fiscal 2025, we expect sale net sales in the range of 5.5 to 6.1 billion. We expect gap and non-gap gross margin down 100 basis points sequentially due to customer and product mix. We expect GAAP and non-GAAP operating expenses up approximately 34 million sequentially and GAAP and non-GAAP other income and expense to be a net expense of approximately $7 million. We expect GAAP net income per diluted share of 48 cents to 58 cents and non-GAAP net income per diluted share of $0.56 to $0.65. The company's projections for GAAP and non-GAAP net income per diluted share assume a tax rate of 14% and 15% respectively, a diluted share count of 640 million shares for GAAP, and a diluted share count of 648 million shares for non-GAAP. The outlook for Q2 of fiscal year 2025 GAAP net income per diluted share includes approximately $54 million in expected stock-based compensation expense and other expenses net of related tax effects of $14 million, which are excluded from non-GAAP net income per diluted share. The final financial results reported for this period may differ from the results reported here based on the review by the new independent registered public accounting firm to be appointed. We are working diligently to select a new independent registered public accounting firm and complete our fiscal year 24 audit. Michael.

Right. Thank you, David. Hey, before we get into questions, we appreciate you may have further questions about the special committee's findings as well as our audit timeline. We're not in a position to address those questions on the call today. So with that operator, we'll take first question.

We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first comes from Michael Ng with Goldman Sachs. You may proceed.

Hey, good afternoon. Thank you for the question. Just on the business fundamentals, you know, revenue came in at the lower end of the guidance. I was wondering if you could speak to that and whether you're seeing any market share losses as a result of some of the delayed financial filings. And how do you feel about the $26 to $30 billion full-year revenue guidance that you previously gave out? And are you hearing from any customers that once this resolution occurs, they'll be able to step up some of their orders, or is it a gating factor? Thank you.

Okay. Thank you for the question, Michael. Last quarter revenue reduced a little bit. I guess the major reason because there are some customers waiting for the new chip, the BlackWare chip, as you know. So people are waiting for a new solution, and the new solution, I mean, the BlackWare base, deep cooling, air cooler, or GP200, our solution indeed is ready. That's waiting for the chip. So I guess that's the major reason. and uh we our capacity can hear the glow and our liquid cooling solution is uh uh fully ready again we can produce uh 15 hundred liquid cool drag for months now so we are really ready that's waiting for the new chip to be available and then i believe we can grow our uh mark share and revenue uh after that

Great. And for David, just on the full year guidance?

Yeah, Michael, we're not providing annual guidance on this call.

Great. Thank you, Charles. Thank you, David. Thank you, Michael.

Thank you. The next question comes from Sameek Chatterjee with JPMorgan. You may proceed.

Hey, guys. Thanks for taking my question. I guess maybe to sort of talk about the gross margins here, you had robust gross margins in the quarter, but you're guiding it down. It seems like maybe it's a bit more choppy in terms of gross margins, depending on customer mix. Does the sort of progression to getting back to the 14% to 17% that you talked about earlier still remain sort of the base case, or are you having to sort of discount more or be more aggressive on pricing on the current generation products? And as a separate sort of a side question, just I know you're not commenting on relative to the filings, but any management changes or any changes in how you operate that you're planning or thinking about to sort of overall improve things in terms of getting more disciplined around and more control around the financial reporting? Thank you.

Uh, thank you so much. Yes, I mean, uh, depends on new product, right? When new GPU chip available as you know, whenever there are new generation of technology, we have an advantage to grow our market share and profitability. At the same time, our data center billion block solution with SCC Supermicro cloud composer that provide flow end-to-end solution that for sure we are gradually grow our gross margin and the net margin as to management team yes we always faster growing you know 2023 we grew 40 percent about and then 10 2021 we grew more than double. And this year, again, we will have a big growth. So when companies are fast growing, we continue to add more people, including senior management. So we are evaluating the possibility, including the performance spatial committee. And we, by the nature, we continue to grow senior management team as well.

Thank you.

Thank you. The next question comes from Aaron Rakers with Wells Fargo. You may proceed.

Yeah, thanks for taking the questions. A couple if I can as well. I just, you know, Charles, I want to go back. I think when you guys had originally guided this quarter, I think the guidance range is like six to seven billion. You came in at, you know, about 500 million at the midpoint short of that. I guess, given the comments to the prior you know questions are you assigning that to just the timing of blackwell or was there something that changed the demand or the timing of deployments this last quarter i'd also add in there i think last quarter when you'd set that guide i think there was like 800 million of sales that you had alluded to as being pushed out of last quarter into this fiscal first quarter did that all close and just Try to bridge that gap for me between the Delta and the guide relative to, you know, the business update today.

Okay, good. Thank you. I mean, this is a complicated question. So I believe that major impact is new chip availability. Because direct wire chip, for sure, is a much higher performance, much better performance for dollars, right? And the good thing is that it will be available gradually. And Q1, hopefully Q1 2015, hopefully volume become much better. And so that's the major factor, I believe. As to our 10K today, may impact a little bit. How much, I don't know yet, but certain impact for sure. But hopefully not too big. As to the whole year, yes, today we do not provide annual guidance. But basically, with our deep cooling DDNH, right, in last few months, we deliver more than 2,000 racks DRC. That, I believe, is a very high percentage for the whole deep cooling market. So for our future growth, I personally still very optimistic.

TAB, Mark McIntyre, yeah Okay, and then two other quick questions, if I can so you know, first of all, I mean you mentioned 5 billion of inventory coming out of this quarter. TAB, Mark McIntyre, You know any any thoughts of where that might trend coming out of this next quarter, you know embedded in your outlook that you provided today and then. TAB, Mark McIntyre, I apologize for asking, I know that you didn't you know you're not going to address the special committee dynamic but. You know, any thoughts on the timing of an auditor, of getting an auditor assigned? Anything you can share on that front? You know, I appreciate that, yes, you know, we're not talking much about that, but I'm curious, any comments on that front?

Okay, for inventory, maybe I can answer a little bit. I mean, the company will continue to grow, I believe. So, $5 billion of inventory, I believe, will continue. a special committee investigation result today. I'm very happy to share some very positive information, but as to detail, once it's available from them, we will share with the market.

And Aaron, we have no update with respect to the audit timeline that we talked about, as we mentioned earlier. Just getting an order.

Thank you. We're working diligently to get that done, as I mentioned, as quickly as possible.

Thanks, guys.

Thank you. As a quick reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The following comes from Ananda Barua with Loop Capital. You may proceed.

Yeah, guys. Yeah, good afternoon, good evening. Thanks for taking the questions. Two, if I could. I guess the first is on gross margin. You know, sort of, should we expect, well, I guess really the question is, is they, should we still expect it to improve as we go through the fiscal year as you were previously anticipating?

Yeah. So, by the way, we, you know, we, guided cautiously in this first quarter on our margin. And so we were glad to be able to exceed it. And so in like fashion, we're guiding conservatively into the second quarter. And so we still have our target margin that we're shooting for. And so we're doing everything that we can to improve that.

Yeah, the competition will sure bring some pressure, as you know. But Blackwell, I mean, a new technology, I personally feel very optimistic for Supermicro's chance to grow. And as I mentioned, the data center building block solution, including SCC, SuperCloud Composer, they provide end-to-end. uh management from chip level to rack scale to uh the hotel center water tower so i believe all of those will help our growth and then we also start to provide able to provide a customer on-site deployment on-site cable and service so all of those are very positive to our business so i feel very positive to uh continue to grow the business i mean

Yeah, thanks for the margin context. Appreciate that. And the follow-up is just, I guess, just a general working capital financing question. This question has come up a lot with investors. And can you just give us, you know, really the question is, can you explain sort of the access to capital situation as we go forward? And I guess, really, how would you like the investment community to think about the access to capital situation? Thanks.

Sure. So Ananda, we put in, we put in the last eight, nine months, you know, $4 billion into working capital from two equity raises and one convert. And so that's really, it really left us with a, in a good working capital situation, exiting Q4 at a run rate of around a billion, of $6 billion. So again, we're forecasting a little bit, a little down in Q2. So that takes care of our working capital needs for a while. So Access, we have a very strong, growing, and profitable company. And so we don't believe that we'll have any impediments to raising working capital.

Yeah, quarterly, every quarter, we are making a reasonable good investment So basically, we should be in good shape.

Okay, guys. Thanks so much. That's helpful. Thank you.

Thank you. The next question comes from George Wong with Barclays. You may proceed.

Oh, hey, guys. Thanks for taking my question. I have two quick ones. Firstly, can you kind of double-click Which quarter do you think that you will stop booking the Blackwell revenue? Last time you guys alluded to sometime in the June quarter, just curious whether that's still on track, which is any kind of high level in terms of when do you think the Blackwell is going to show up in the P&L?

Yeah, very big question. Indeed, we're asking in VTR every day. So I hope their production can go smooth and go for high volume very soon. And once they have a chip available, our solution are fully ready. So we continue to work with them very closely to develop a current product, GB200, MVLR72, and B200 liquid coolant and and air cooler and we also design some really enhanced drag scale solution. So in terms of total solution, we have a very strong offering waiting for the chip so. We we need a video that quick as the pool. Thank you.

What about it? That's helpful. Just a quick one. If I can just just how to think Gross margin in the area of Blackwell versus Hopper. Just curious if you can talk about puts and takes on the gross margin for the GB200, especially in light of reference design from NVIDIA, any kind of incremental value add from Supermicro, just as we kind of head to the Blackwell, just in relation to the profitability and the kind of margin profile. Thank you.

Yeah. Yeah, thank you, but like a way out for sure. We estimate more competitive right because people know AI market is so big now. So we said back where we expect more competition, but at the same time we also were prepared by our data center building block solution with our end to end. Super cloud composer and with our on site deployment cabling service business. So those are new and I believe we are able to provide a very unique, very efficient time to delivery time to online advantage to customer. So yes, competition is strong, but I believe we are in good position.

OK, thanks a lot Charles. I'll go back to the queue.

Thank you. The following comes from Nihal Chokshi with Northland. You may proceed.

Yes, thank you. Thank you for taking my questions. A couple questions, please. First, Dave, any 10% customer exposures in the quarter, in the upcoming quarter?

Indeed, we will have 10% customers now.

Could you give us some detail as far as What percent of overall revenue do the 10% customers represent in the September quarter?

Yeah, so we're not going to release that data today.

Yeah, but at the same time, we continue to gain more new customers, especially in Europe and Asia. So I believe we will be able to keep a healthy ratio.

Robert Marlayson, Okay, great and then Charles. Robert Marlayson, You know I think there's a strong feeling and investment community that the chairman of the roles if separated could be quite beneficial super micro from your perspective, what is the benefit of super micro separating these roles.

okay well i would have paid for the company that's my consideration so uh um every day you know every day that every week i have been thinking about a question since uh many years ago and uh so again why would a baseball business so i personally very open mind and uh I'm technology guy, and technology is my best interest. But still, overall consideration is the best benefit for shareholder and the company.

And just to be clear, do you see it potentially being in the interest of the shareholder of that, of separating these roles here?

uh no comment at this moment but i'm seriously consider about it and someday i will retire for sure hopefully nine one year two years but somebody that i will retire so i mean those are a change for sure is a natural but why would a base of a shareholder and for uh for a company and for my family too thank you for taking my question thank you

Thank you. The next question comes from Vijay Rakesh with Mizzou. You may proceed.

Hi, Charles. So on the September quarter and December quarter, just wondering how many liquid cool racks you're shipping in September and if you have some idea in December?

David, do you have some number this year? It was just a little below last quarter. but I don't have the exact I would have to say we are a company ship most or liquid cooling rack to the market recently for example in September quarter and our liquid cooling because ahead of the market so and customized our liquid cooling because save their energy power and the and safe water requirement and kind of It is a trend. So I believe we will continue to grow deep cooling percentage.

Got it. And when you say down sequentially into December quarter on the H200 liquid cooling, any idea on how much that is sequentially? Okay.

uh we we did not share the number but uh i believe uh dick cooling will continue to grow very quickly and we are very happy to promote that got it and yeah from our last question yeah go ahead go ahead vijay sorry um i think david on the number 16 um

Amit Singer- deadline, are you guys comfortable that you will have an auditor and file a plan to the master.

Mark Warren, So we're not we're not answering those questions today. Mark Warren, So we're we're we're we're like I said we're diligently you know we're diligently looking to replace the auditor as quickly as possible, and we will be following a plan with nasdaq. and indeed regarding an extension. And so, you know, but that's all we have to say about that.

Good. Thank you.

Thank you. The next question comes from John Hamilton with CJS Securities. You may proceed.

Hi. Good afternoon and thank you for taking my question. I was wondering, Charles or David, could you, James Meeker- break out what your expected revenue in blackwell was supposed to be in the Q1 guidance and what you're what you have implied in the Q2 guidance, first of all, and then second. James Meeker- Do you see a risk of supply or allocation due to this auditor and filing issue, especially from nvidia you know just would they possibly you know. James Meeker- Maybe hold back some just until you figure it out, or are they supporting you through this, and you know just media orders and, especially with a new technology, thank you.

Yeah, our relationship with Nvidia has been multiple decades and our growth kind of cooperation between two companies continue to enhance. So we have many important code developed, and I don't expect any negative allocation from them. So at this moment, according to our relationship, according to our communication, things are very positive.

Great. And then I guess the Blackwell numbers that were implied in the last quarters and this quarter's guidance?

That's hard to answer because we don't know what's the volume of NVIDIA BlackWare available every month. So we work with them very closely and co-develop a solution, validate a solution, and service the common customer. So once they have a good volume available, I believe we will have a good percentage in our product mix.

Got it. Thank you. And then if I could sneak one more in there, if I could. Is there more efficiency to be unlocked in your liquid cooling supply chain, or have you mostly resolved the issues in ramping your production capacity and supply chain?

You know, we focused on liquid cooling much earlier than the industry. So in the last few months, we already shipped more than 2000 rack right and so far the feedback from customer are very happy indeed that our quality the customer satisfaction uh even better than our uh air cooler solution so feel very excited our how will change in last three years uh that pain off and we believe the recording will continue to be our major advantage including uh the whole data center end-to-end Again, not just liquid cooling rack, but kind of deployment, cabling, service, management software. So we are very excited for our DLC liquid cooling solution. And customers like that.

Great. Thank you. And good luck with finding a new auditor.

Thank you.

Thank you. The following comes from Mehdi Osini with SIG. You may proceed.

Mehdi Osini Yes, thanks for taking my question. David, from what I understand regarding cash flow, it seems like there was a one-time positive impact. Your days of inventory went up, but you were able to significantly increase your operating cash flow. Did I hear you correct? If so, what is the item that helps you with positive operating cash flow?

Sure. You know, I think the answer is, Mehdi, that we've been growing at such a high rate, you know, over the past quarters, that that's really what's been impacting our operating cash flow, is that we've had to pour hundreds of millions of dollars into inventory as well as into accounts receivable. So, you know, kind of coming off of a quarter where we didn't have such a dramatic increase in revenue, we were able to generate a lot of cash, you know, basically a billion dollars worth of improved cash flows. So it was really, yeah, so it was really just the fact that for the reasons Charles mentioned, The growth wasn't as high. I understand. We didn't answer a question. Yeah.

I understand, but your DSO went up. I'm sorry, your days of inventory went up, and I think from what I heard from you, your DSO didn't really change. So was that improvement in operating cash flow all driven by working capital reduction, or was there something outside of working capital that helped you?

No, it was really for those reasons. It was really just for an AI inventory equation.

Yeah, maybe. I mean, maybe I can have it. I mean, when we grow about 200% more year over year, right? So for sure, and we see continue to grow, right? So for sure, we need a much higher inventory to support our customer demand. And then when our growth become more normal, now, 200% year over year, for example, 100% or 80%, then we don't have to grow that much of inventory. And that will help our cash flow. So it's a good trouble, I would have to say.

It's a good challenge.

Sure, sure.

Got it. And then, Charles, maybe you can help us, give us an update on your total capacity, especially with the Malaysia

expansion and how should how is the utilization of the global installed capacity tracking uh very good question uh we expect we will continue to grow very fast that's why we have been preparing a huge capacity in silicon valley in taiwan and now especially malaysia So long term we need those capacity, but in terms of iteration rate at this moment, I would like to say a little bit no, because capacity is ready, but no such, no enough new chip, as you say that, no enough new chip. That's why iteration rate now is relatively low, maybe only 50%. I see.

Sure.

Sorry, David, go ahead.

This is Dave. Yeah, I was going to give you a couple other tips on cash flow. You'll probably notice that because of an improved gross margin, we had almost $80 million on a non-GAAP basis, more profit this quarter. In addition to that, you know, again, going back to working capital metrics, we increased our accounts payable by several hundred million dollars. So that, those are other factors that go into improved operating cash flow. David Chambers.

Hey, Tamia, before we go to the, before we go to the next question, thank you, Maddie. Before we go to the next question, I just wanted to clarify one of the comments from earlier with respect to NVIDIA and clarify, you know, we have the deepest of relationships with NVIDIA at the technology level. It goes back decades. And now we have multiple state-of-the-art projects in progress, and we spoke in the video, and they've confirmed there have been no changes to allocations, and we maintain a strong relationship with them and don't expect that to change. So I just wanted to make sure that was clarified. Next question. Actually, our last question to you.

Absolutely. Our final question comes from Quinn Bolton with Needham & Company. You may proceed.

Hey guys, thanks for taking the question. I guess just want to follow up on the kind of the slightly weaker than expected first half really sounds like it's just customers waiting for new Blackwell chips. Are you guys seeing that starting to show up in the order books, meaning you're building backlog for either the NBL rack or the Blackwell P200 systems? So you see, you know, nice building backlog for those systems. Obviously, you don't know when you'll get the chips, but they give you confidence for a much stronger second half once Blackwell starts to ship. Or is it too early for you guys to be actually getting those orders or POs at this point?

Yeah, our solution is very strong and I believe NVIDIA will continue to allocate their solution to the company, the customer, whoever based the total solution. Because at all, common end user satisfaction is the most important to every company, right? So I would like to say our solution is very strong and we continue to work with NVIDIA very closely and to provide the basic total solution end-to-end solution to customers. That's why we started to provide on-site deployment, on-site cabling, on-site service. And all of those new offerings are very attractive to lots of new customers and old customers. So we feel very comfortable for the coming soon new chip solutions.

So, so the backlog for Blackwell, you're, you're seeing that building on your order books.

Uh, we provide in, uh, uh, kind of remote, uh, POC now. And, uh, so things are happening.

Okay. The second follow up question for David. You've recently sort of filed new credit agreements with both of your banks, just setting a date when you would have to provide the audited financials. To the extent that you don't hit that date, what happens? Do you just have to go renegotiate new credit agreements? Do the banks at that point have the right to effectively call those term loans or just – wondering if you might be able to address what happens with both the bank debt and if there's any risk to the convertible debt if you don't provide audited financials within the prescribed time.

Yeah, so I think we'll just refer you to our AK filings. You know, we have long-term and good relationships with the banks. And so, you know, as necessary, we will file extensions, yeah, or get waivers. And As I mentioned earlier, we're not concerned about the company's ability to access the capital markets.

Thank you.

Thank you. There are currently no other questions in queue, so I will now turn it back over to the management team for closing remarks.

Thank you for joining our conference call today, and we'll look forward to talking to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.