Super Micro Computer, Inc.

Thank you for standing by. My name is Matt and I'll be your conference operator today. At this time, Please press star one on your telephone keypad.

Over to you, Michael.

Thank you. Good afternoon and thank you for attending Supermicro's call to discuss financial results for the second quarter and full year fiscal 2026, which ended December 31st, 2025. With me today, as you know, is Charles Liang, founder, chairman, chief executive officer, and David Wiegand, chief financial officer. By now, you should have received a copy of the press 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 IR section of the company's website under 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 the discussion table consists of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income expenses, taxes, capital allocation, and future business outlook, including guidance for the third quarter of fiscal 2026 and full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions involved, material risks and uncertainties that could cause actual results or events to be materially different from those anticipated, and you should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier this afternoon, our most recent 10-K filing, fiscal 2025, and other SEC filings. All these documents are available on the IR page of Supermicro's website. We see 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 message, please refer to accompanying presentation. or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors the means of evaluating and understanding the company's management, that management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. 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. Our third quarter of fiscal 2026 quiet period ends at the close or begins at the close of business Friday, March 13th, 2026. And for now, I will turn the call over to Charles.

Thank you, Michael. And thank you all for joining today's call. Super Michael delivered a strong Q2 as AI infrastructure demand continues to accelerate across every major customer segment. For a quarter, we achieved a record 12.68 billion in revenue, including 1.5 billion before the former top of account last quarter, representing 123% year-over-year growth. This strong performance reflects the sustained momentum of our AI solutions and the drug scale systems as Cosmo view our next generation AI factories. Supermicro has been developing some of the largest and most complex AI cluster ever built, highlighting our unmatched capability in large scale manufacturing on site deployment and integration. Most notably, our data center building block solution, or DCBBS, has started to gain some key customer preference as they look for quicker time to deployment, TTD, and quicker time to online, TTO. These pre-designed, pre-validated infrastructure building blocks not only speed up customers' data center build, but they also save cost with better workload optimization and with minimal power and water consumption. BCPPS will significantly help us gain market share in large, medium, and small AI infrastructure deployments. With GP300, B200, B300, and MI350 platforms, we are also preparing for the upcoming NVIDIA, VERA Rubin, and AMD Helios solutions for the second half this year. While we continuously growing AI factory build out customer and product mix, shifting a shift more to a large model builder who had pricing leverage, pressuring gross margin. In Q2, especially the expansion expedite transportation costs, ongoing components shortage, and their volatile pricing, among which tariffs, impact our short-term growth margin. As such, I would like to take a moment to highlight our key strategies to address this and efficiently strengthen our long-term profitability. First and foremost, Supermicro undergoes its first phase of product evolution with DCBPS as its key focus. As this data center degrades scale, DCBPS is and will become an increasingly important part of our value. In the first half of fiscal year 26, DCBPS solutions accounted for 4% of our profit. We expect this part of our profit to grow and meaningfully contribute to the second half of fiscal 26. And we see that growth accelerate to at least double this contribution by end of calendar 2026. With compressed GPU-CPU lifecycle, DCPPS become critical helpful to the value of our server and storage products by enhancing the data center infrastructure time to delivery and time to online, reducing power and water consumption, and cost efficiently simplifying data center management and maintenance. In just about one year, our DCPBS product lines grew to more than 10 key subsystems, including CDU. air-to-air heat exchanger, chill doors, power shelves, battery backup, water tower, dry towers, high-speed switching, data center management software, and service. We are expanding this product line to include more new categories, such as transformer, next-generation power generators, device for energy backup, great power replacement for the strength in customer value accelerating deployment and supporting long-term profit margin improving for super micro other than developing pc pps for better value and portability we are also sharpening our focus on traditional enterprise cloud and edge iot customers to further diversify revenue with higher margin. In addition, we have introduced our X14 and H14 Go series solutions, featuring pre-configured systems that ship directly from our factory, enabling rapid deployment, optimized for specific AI cloud storage and telco edge workloads. These servers are ready to power up immediately and reinforce Supermicro's core value time-to-market advantage for enterprise customers, channel partners, and SMB end users. We are also driving meaningful cost improvement through enhanced design for manufacturing, DFM, and quality-driven engineering. We have introduced more marginalized subsystems and expanded automation across our facilities. These efforts increase ERA, reduce new work, and enable us to bring new platform to volume production even faster and with higher quality. As product cycle shortened and technical complexity increased, designed for manufacturing advancement are essential for scale, efficiency, and long-term margin improvement. While executing these DFM initiatives, we are also continuing to expand our global manufacturing footprint aggressively and strategically. Our Silicon Valley facility remains the cornerstone of our U.S. operations. delivering faster time-to-market, strong security, and higher quality integration. Internationally, new production sites in Taiwan, Malaysia, and Nasdaq, and soon the Middle East, are ramping to increase capacity, support regional solving AI requirements, and most importantly, optimize our overall coastal structure. In summary, as the only company with more than 32 years of robust server and storage focus, SuperManko is quickly evolving into a leading AI platform and data center infrastructure total solution provider. Strong Q2 performance, rapid expansion of DCPBS product line, deeper and more customer engagement, and global capacity investment. Position us well for long-term growth, well near-term margin pressure from customer mix, tariffs, international facility expansion, and key component shortage, like memory and storage shortage. Our focus on enterprise business uh designed for manufacturer improvement and the faster growing pc bbs portfolio all help us gain new customers support higher growth and net margin going forward lastly based on our broader customer back order forecast and commitment we believe demands for ai and IT infrastructure remain unprecedentedly strong. Our DCPBS solution is exactly what customers need to build out their AI and cloud much faster, greener, and lower total cost. With that in mind, I'm confident to guide at least $12.3 billion for Q3 and up our full-year revenue guidance back to at least $40 billion. I look forward to sharing our progress with you next quarter. Thank you. Now I will turn it over to David.

Thank you, Charles. We achieved record Q2 fiscal year 26 revenue of $12.7 billion, up 123% year over year, and up 153% quarter over quarter, compared to our guidance of $10 billion to 11 billion. Q2 revenue included approximately 1.5 billion in delayed Q1 shipments due to customer readiness. Growth was driven this quarter by the rapid ramp and deployment of our rack scale AI solutions. Despite supply chain challenges in the industry, our global manufacturing team executed well in delivering record revenue. Order strength remains strong from global large data center and enterprise customers. AI GPU platforms, which represent over 90% of Q2 revenue, continue to be the key growth driver. During Q2, the enterprise channel revenue segment totaled $2 billion, representing about 16% of revenue versus 31% in the prior quarter. That's up 42% year-over-year and up 29% quarter-over-quarter. The OEM appliance and large data center segment revenue was 10.7 billion, representing approximately 84% of Q2 revenue versus 68% in the last quarter. This was up 151% year-over-year and up 210% quarter-over-quarter. For Q2 FY26, one large data center customer represented approximately 63% of total revenue. By geography, the US represented 86% of Q2 revenue, Asia 9%, Europe 3%, and the rest of the world 2%. On a year-over-year basis, US revenue increased 184%, Asia grew 53%, Europe decreased 63%, and the rest of the world increased 77%. On a quarter-over-quarter basis, U.S. revenue increased 496%, Asia decreased 49%, Europe decreased 51%, and the rest of the world increased 53%. The Q2 non-GAAP gross margin was 6.4% versus 9.5% in Q1. Gross margins were impacted by customer and product mix, as well as higher freight, production, and expedite costs as we began to ship new platforms on a large scale. We had significant operating leverage during the quarter with total non-GAAP operating expenses representing 1.9% of revenue versus 4.1% last quarter. Q2 GAAP operating expenses were $324 million, up 14% quarter over quarter, and up 8% year over year. On a non-GAAP basis, operating expenses were $241 million, which was up 18% quarter over quarter and up 6% year over year. Operating expenses were up quarter over quarter, largely due to higher sales expenses. Non-GAAP operating margin for Q2 was 4.5% compared to 5.4% in Q1. Other income and expense for Q2 totaled a net income of $26 million, reflecting 51 million in interest income on higher cash balances, partially offset by 25 million in interest expense, primarily related to our convertible notes. The tax provision for Q2 was $99 million on a GAAP basis and 122 million on a non-GAAP basis, resulting in a GAAP tax rate of 19.8% and a non-GAAP tax rate of 20.6%. Q2 GAAP EPS was $0.60 compared to guidance of $0.37 to $0.45, and non-GAAP diluted EPS was $0.69 versus guidance of $0.46 to $0.54 due to higher revenue and operating leverage. The GAAP fully diluted share count increased sequentially from $663 million in Q1 to $673 million in Q2. and the non-GAAP share count increased from $677 million to $688 million over the same period. Cash flow used in operations for Q2 was $24 million compared to $918 million used in the prior quarter. On a quarter-over-quarter basis, Q2 operating cash flow reflected higher net income, offset by higher accounts receivable and inventory levels, and aided by higher accounts payables. Q2 closing inventory was 10.6 billion, up from 5.7 billion in Q1 as we prepared for continuing strength in Q3 shipments. CapEx for Q2 totaled 21 million, resulting in negative free cash flow of 45 million for the quarter. During the December quarter, we expanded our access to working capital to fund growth executing a $2 billion cash flow-based secured revolving credit facility in the U.S. In January, we also closed an approximately $1.8 billion secured Taiwan revolving debt facility. At quarter end, our cash position totaled $4.1 billion, while bank and convertible note debt was $4.9 billion, resulting in a net debt position of $787 million, compared to a net debt position of $579 million in the prior quarter. Turning to the balance sheet and working capital metrics, the cash conversion cycle significantly improved from 123 days in Q1 to 54 days in Q2. Days of inventory decreased by 42 days to 63 days versus 105 days in the prior quarter. day sales outstanding increased by six days to 49 days versus 43 days in q1 while days payables outstanding increased by 32 days to 58 days versus 26 days in q1 turning to the outlook for q3 fy26 we expect net sales to be at least 12.3 billion gap diluted net income per share of at least 52 cents and non-GAAP diluted net income per share of at least $0.60. We expect gross margins to be up 30 basis points relative to Q2 FY26 levels. GAAP operating expenses are expected to be around $354 million, which include approximately $74 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q3 of fiscal year 2026 fully diluted GAAP BPS includes approximately $62 million in expected stock-based compensation expenses, net of the tax effects of $19 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to result in a net expense of approximately $22 million. The company's projections for Q3 FY26 gap and non-gap diluted net income per common share assume a tax rate of 19.6%, a non-gap tax rate of 20.2%, and a fully diluted share count of $684 million for gap and $699 million shares for non-gap. Capital expenditures for Q3 are expected to be in the range of $70 to $90 million. For full fiscal year 2026, we expect at least $40 billion in net sales. Michael, we're now ready for Q&A.

Great. Matthew, can you roll the queue?

If you'd like to ask 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 ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions register. First question is from the line of Ananda Barwa with Loop Capital. Your line is now open.

Hey, yeah, thanks, guys. Good afternoon. Thanks for taking the question, and yeah, congrats on the solid results here relative to the guys. I want to just ask about margins, and I have a few big questions I want to ask you here, but they're all margin related. I guess the first is with regards to you mentioned, I think, 90 days ago, that December quarter you expected to be sort of the low watermark quarter in gross margin, and you're guiding for QVQ improvement for the March quarter. Do you still think that things progress expansive from here, Charles? You made some comments around customer mix.

uh it's been a headwind do you think it continues to improve and i have two quick follow-ups today just margin related after that thanks yeah thank you for the question yes the customer mix uh we are improving uh quarter out of the quarter now we have uh many more large-scale customers i would like to say so that will improve our profitability the other factor is uh Last quarter, I mean December quarter, GP 300 was a little bit new to us, so lots of expedite transportation costs and now I mean a product is getting mature so those expedite transportation costs will be dramatically reduced and tariff impact also improving and so overall especially DCPPS also increasing for our net, for our gross margin. So I believe our gross margin will start to improve quarter after quarter.

Charles, that's great context. Really appreciate it. And actually, Charles, one of my two clarifications here is from something you said in your prepared remarks. You said higher net margin. And so I guess you just clarify, you expect growth margins to go up. Maybe this is a Charles-Dave question. Dave, you mentioned OpEx leverage. The OpEx as a percentage of sales was really attractive this quarter. It's like 1.5%, I guess less than 2%. But should we expect I think it's the second quarter in a row. You drove OpEx leverage last quarter, this September quarter, for the first time in a while. But now you have this really attractive, the most attractive OpEx percentage of revenue in a while. So is the company entering a period of not only gross margin expansion, but OpEx dollar leverage as well, structurally? And that's it from you guys, thanks.

Yes, exactly. I mean, economical scale will help us to improve the cost, our cost, right? So that will impact our growth margin and especially operation margin. And again, DCPPS brings Supermicro for more business in service, in solar, in overall infrastructure, service to customer. So all those factors are positive to our margin improvement.

Very helpful context. Thank you, guys. Really appreciate it.

Thank you. Thank you for your question. Next question is from the line of Sonic Chatterjee with JPMorgan. Your line is now open.

Hi. This is MP on behalf of Sonic Chatterjee. I just wanted to double-click on your full-year guidance. You said $40 billion for FY26. If I back into the implied 4Q number, that implies significant quarter-over-quarter moderation. So is that just conservatism being embedded into the full-year outlook, or do you see definite indications from your order trends that 4Q will imply sequential moderation? And I have a follow-up as well.

Yeah, I believe we say minimum 40 billion. is a relatively conservative number. So our business indeed will continue to grow, especially our DC, DPS that attract lots of customers who want to build a data center quicker, less power consumption, less cost, I mean better cost, and also more reliable and easy for management. So we are getting more and more customers come to us.

Thank you. And for my follow-up, I wanted to ask about DCBBS. You highlighted it being 4% of profits in first half. Can you please help us understand the contribution in terms of revenue? And then you also said it will increase to double-digit contribution by end of calendar year. So how does that translate to overall gross margin trajectory? Thank you.

Yeah, thank you. I mean, as you know, DCBBS is still a new product line to us. we officially introduced that product about six months ago. So, in the first two quarters, I mean, September quarter plus December quarter, indeed, is our first two quarters. So, the revenue is still relatively small, but because the profit is much better. So, OBO is a contributor, about 4% to our overall profit in that six months. And looking forward, it will continue to grow very quickly. So we are very happy to see more and more customers like DCPBS to speed up their data center view out with EGL for management, EGL for maintenance, and our part will continue to grow because of DCPBS especially. Thank you.

Thank you for your question. Joseph Baeta, Supt of Schools, Thank you next question is from the line of Ossie a merchant with city your lines open.

Great, thank you for taking my question and good results here relative to the guide. I just had two quick ones one just you know there's a lot of discussion about component availability supply constraints, if you could just talk to us about your guide and relative to that. You know, is that minimum $40 billion guide, you know, a constraining number given the supply constraints? In other words, if supply wasn't an issue, could that number be greater? And then just on customer concentration, you know, I think the commentary suggested that some of the GOs did decline on a year-on-year basis as well as on a quarter-on-quarter basis. So again, relative to the guide, how should we think about the ramp of DCPBS across

those various geographies for the back