Super Micro Computer (SMCI) Q1 FY27 Earnings Call Transcript

Michael Staiger00:00

I'm I would like to welcome everyone to Super Micro's first quarter fiscal year 2027 earnings call. Joining us today are Charles Liang, founder, president and chief executive officer, Mark Long, chief financial officer, former chief financial officer, David Wiegand, and Michael Staiger, senior vice president of corporate development.

Operator00:19

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 to raise your hand to withdraw your question, press star one again.

Operator00:23

Thank you. Michael Staiger, you may begin your conference.

Michael Staiger00:42

Thank you, Jen. Good afternoon and welcome to Super Micro's conference call for the first quarter of fiscal 2027. 2027. As you heard with me today are Charles Liang, founder, chairman, chief executive officer, Mark Long, chief financial officer and former chief financial officer, David Wiegand.

Michael Staiger00:49

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.

Michael Staiger01:04

Our call is being webcast live on Super Micro's investor relations website and will be available for replay until the conference call um until later till to discuss our financial results for the second quarter of fiscal 27. The content of today's call is Super Micro's property.

Michael Staiger01:17

It can't be reproduced or transcribed without our prior written consent. During this call, we may make forward looking statements based on current expectations including with respect to our business plans and performance ongoing market trends and future financial results.

Michael Staiger01:37

These are subject to a number of significant risks and uncertainties and our actual results may differ materially. For discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release our most recent form 10-K and Q and the reports that we may file on form 8-K with the Securities and Exchange Commission.

Michael Staiger01:51

All all of our statements are made as of today, November 3rd, 2026 and are based on information currently available to us. Except as required by law, we assume no obligation to update any such statements during this call. We will discuss non-GAAP financial measures.

Michael Staiger01:58

You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our prepared remarks which is posted on our website.

Michael Staiger02:08

Our second quarter fiscal 27 quiet period begins at the close of business Friday December 11th 2026 with that let me turn the call over to Charles.

Prepared remarks

Charles Liang02:36

Thank you Michael and thank you all for joining us today following fiscal 2026 2026 we nearly double our annual revenue fiscal 2007 is off to a record start Q1 revenue reached $19.9 billion beating the high end of our pre-announcement and well ahead of our original outlook of 15 billion dollars.

Charles Liang03:04

This is a great achievement and it shows more and more customers prefer our AI and IT total solutions. Most importantly, our data center building block solution DCBBS are central to this growth, driving deep customer trust and preference.

Charles Liang03:23

Enhancing our profitability and creating a sustainable long-term shareholder value. Over for over 30 years, Super Micro's focus has always been on delivering optimized total solution value to our customers.

Charles Liang04:00

We will continue leverage our engineering technology global resource and manufacturing capacity with high yield to accelerate the customers deployment moreover I'm glad that not just large cloud and near cloud small cloud company and organization across enterprise storage IoT and both country and corporate sovereign verticals are relying on and adopting Supermicro's total solution every day.

Charles Liang04:28

We have executed our commitment to drive higher bottom line profitability in Q1. Non-GAAP gross margin expanded by 330 basis points year over year to 12.8%. This expansion was driven by a healthier customer mix across enterprise AI and IT accounts.

Charles Liang04:49

Diverse product line built on our system building blocks and growing revenue contribution from our higher margin DCBBS mode. including our DCBBS hardware, software, software, and unique service stacks.

Charles Liang05:14

This directly aligned with our strategic roadmap to build a sustainable double digital growth margin model by delivering superior technology innovation, faster TTM and TTD faster time to market and faster time to deployment and total solution value.

Charles Liang05:32

Proven over more than two years, in real world customer deployments, DCBBS delivers four key values that no traditional server OEM and overseas CM can match.

Charles Liang05:51

First, optimized TTD time to delivery by delivering factory test plug and play rack scale systems and DCBBS building block complete solution including data center management software directly to customer site.

Charles Liang06:31

Second, optimize TTO time to online for shortening life compute readiness. From quarters to months and further down to weeks, and third, DCBBS maximize system uptime through building block that eliminating thermal power software and service bottleneck and number four lower TCO by slashing energy consumption and facility downtime to accelerate and improve data center profitability.

Charles Liang06:54

Whether our customers are building gigawatt scale AI factory or deploying rapid single container pod solution, Supermicro's DCBBS help have built AI infrastructure faster better greener and at a lower cost to our customers.

Charles Liang07:35

Because optimize hardware alone cannot run an efficient AI data center. Managing thousands of liquid cooled GPU rack require intelligent real time software orchestration Super Cloud Composer SCM delivers seamless rack scale management and full stack hardware facility integration Super Micro data center manager SDM provide complete power and thermal control from individual node up to floor building infrastructure.

Charles Liang08:02

For end to end hardware life cycle management. and our Super Micro Operation Manager SOM suite featuring director and developer console modules enable bare metal model and token as service with ease for LLM and agentic AI workloads.

Charles Liang08:21

Attaching SCM, SDM, and SOM directly to our DCBBS portfolio eliminates software fragmentation for our customers while driving higher value software attach rate.

Charles Liang09:13

Furthermore, SCM enhanced core home service now features AI driven low cost diagnosis significantly improving data center uptime and giving our customer complete operational confidence equally critical to our total solution advantage is our new expanded global data center service organization Here, our on-site deployment teams backed by R&D engineer and well trained post deployment service staff work directly alongside customers teams through tier service offering to efficiently maximize cluster uptime.

Charles Liang09:31

By using automatic telemetry our service team continuously monitoring thermal power delivery and node health in real time to solve potential problem before they cause downtime.

Charles Liang10:07

While our dedicated on-site engineer handle deployment validation and immediately hardware maintenance. This proactive high touch service model build deep customer trust drive high value recurring service revenue and fulfill our highest commitment bringing complete peace of mind to our customers through high quality infrastructure total solutions.

Charles Liang11:32

To realize this unmatched list of solution efficiency our global manufacturing footprint and scale are ramping rapidly we are actively expanding our physical footprint with major projects underway in Silicon Valley and Taiwan that will add million of square feet of fully automated production space and active service bandwidth furthermore we are accelerating our containerized data center production in Asia and USA together our global manufacturing and service network put us on track to produce more than 8,000 orders most powerful racks per month including over 4,000 DLC racks by this December on the technology front Super Micro continues to lead the market across major silicon platforms we are among the first to market shipping NVIDIA Vera Rubin NVL72 racks with our DCBBS and DLC2 liquid cool stack.

Charles Liang11:53

We recently have also launched the NVIDIA Rubin Rubin and Vera Rubin CPU rack and they are ready to ship now as well. By the way, our optimized DSX pod solutions are also coming soon.

Charles Liang12:09

For AMD, MI350 and MI355 X platform had good demand momentum now still as we advance to Helius and MI450 total solutions.

Charles Liang12:26

Additionally, we are progressing Intel Geon 6 Plus Plus platform alongside our new ARM AGI CPU based solutions. optimized specifically for agentic AI market.

Charles Liang12:48

At the same time, we continue to expand our comprehensive edge and IoT product portfolio. While consistently growing our storage product line, bringing real time complete package of infrastructure capability directly to the intelligent edge.

Charles Liang13:09

This new product accelerate our strategy strategic focus on enterprise customers as company expand toward scaling agentic model. Enterprise data governance and high throughput inferencing workload.

Charles Liang13:22

We recently announced several major strategic partnerships combining Super Micro's DCBBS with the world's leading technology company.

Charles Liang13:43

Including Cisco NetApp, Nutanix, and others. With additionally tier one tier one partnership coming soon, we are embedding Super Micro DCBBS footprint deeply into the world's most trusted enterprise

Charles Liang14:06

I know some investor and market experts have recently raised question and concern about AI capital expenditure efficiency and return. on investment. Let me be clear, Super Micro is uniquely positioned to thrive in this

Charles Liang14:31

Environment. For over 30 years, we have been focusing on the server and storage industry, right here in the United States. longer than almost all of our competitors. Building a mature well-established domestic manufacturing and engineering footprint that our competitors simply hard to match.

Charles Liang15:21

This deep US heritage and combined with our unique DCBBS hardware software and service total solution directly solve the ROI challenge for our customers by optimizing TTD time to delivery TTO time to online and computing uptime and energy efficiency whether our customers are building massive tier one AI factory or deploying enterprise agentic AI workload Super Micro ensure their capital investment convert into revenue faster and more cost efficiently than anyone else.

Charles Liang15:43

We believe we are driving strong internal discipline through continuous operational optimization, factory automation, and scale development through technology process refinement and training.

Charles Liang15:57

We have successfully reduced our inventory and production turnaround time from about 100 days to 74 days over the past three quarters.

Charles Liang16:14

Looking ahead, our target is to further streamline our inventory and production cycle down to 50 days over the coming quarters it's not easy but we believe we will achieve it.

Charles Liang16:28

This ongoing efficiency optimization will continue to strengthen Supermicro's cash flow working capital cycle and drive higher bottom line profitability.

Charles Liang16:48

As a matter how competitive the market gets, more customers will love Super Micro DCBBS that include data center end to end hardware, management software and end to end data center services.

Charles Liang17:13

Now let's turn to our outlook for fiscal year 2027. While overall demand and our growth momentum remain very strong across every front, we must be recognize that key component shortage continue to impact delivery timeline across the IT industry.

Charles Liang17:35

Even GPU. New customer program and strategic ecosystem partnership are ramping strongly. But we want to remain prudent about some key components availability and volatile pricing.

Charles Liang18:22

Based on what we see today we are anticipate our fiscal 2027 revenue target will be in the range of 72 billion to 82 billion that is about 12% higher than the target we set one quarter ago before I turn the call over I want to highlight a few important leadership update first we are pleased to welcome a long time industry technology leader Asiya Merchant to our board of directors bringing deep data center operational experience and expertise to support our scaling.

Charles Liang18:44

Second, my sincerely thanks to David Wiegand for his six years of CFO leadership during our period of massive growth. we look forward to his ongoing support and contribution in optimizing our operation to a much bigger scale.

Charles Liang19:03

Finally, I'm delighted to introduce Mark Long our new CFO. who whose dedicated I guess 30 40 years of tech and financial leadership will be a strong help for our next phase of growth.

Charles Liang19:06

Now I will transfer the call to Mark.

Mark Long19:24

Thank you, Charles, and good afternoon, everyone. This is my first call with you, so let me take two minutes before we get to the numbers. I've spent much of my career in technology infrastructure finance, including as chief financial officer of a public company in this industry.

Mark Long19:42

What brought me to Super Micro is that the hardest part is already built. Deep engineering advantage a real lead in liquid cooling and rack scale integration and a key position in the largest infrastructure build out of our careers.

Mark Long20:12

What the company needs now is financial capability that matches its engineering and operating capability I'm excited to join Super Micro at this pivotal time and look forward to helping Charles and the team continue to deliver an expanding portfolio of innovative solutions to a growing global customer base including some of the largest most demanding customers who are shaping the future of the AI era.

Mark Long20:29

To do that will require continued financial discipline transparency deeper engagement with stakeholders working capital management and capital structure optimization which will be my areas of focus.

Mark Long20:31

Now to the quarter.

Mark Long20:42

Total revenue was 19.9 billion dollars up 290 98% year over year and 79% sequentially.

Mark Long20:59

That is above our guidance range of 14.5 billion to 15.5 billion dollars and above the preliminary range of 18.5 billion to 19.5 billion dollars we provided on October 20th.

Mark Long21:12

As Charles noted, approximately 2.3 billion dollars represented deployments originally scheduled for earlier periods due to customer and data center readiness.

Mark Long21:19

Excluding that underlying revenue was approximately 17.6 billion dollars.

Mark Long21:42

AI solutions contributed approximately 71% of revenue. compared with 59% in Q4. Based on our current backlog we expect AI related solutions to represent approximately 70 to 80% of revenue for fiscal 2027.

Mark Long21:54

Enterprise and channel revenue was 4.9 billion dollars or 25% of revenue. revenue. Up 229% year over year and down 12% sequentially.

Mark Long22:11

OEM appliance and large data center revenue was 14.7 billion dollars or 74% up 321% year over year and 167% sequentially.

Mark Long22:27

Driven by production ramps on several large AI data center design wins. The 5G telco and edge segment while still small in relative terms grew significantly both year over year and sequentially.

Mark Long22:38

By geography, the United States represented 80% of revenue, Europe 11%, Asia 6%, and the rest of the world 3%.

Mark Long22:45

The United States grew 771% year over year and 103% sequentially.

Mark Long23:06

While the US remains the largest market for large scale AI data centers, we are seeing growing momentum in other regions as large customers expand globally and governments and enterprises plan and fund significant AI data centers in Europe, Asia, and the Middle East.

Mark Long23:17

In the quarter, one large data center customer represented 44% of revenue. Compared with 28% for fiscal 2026 2026 as a whole.

Mark Long23:27

In our 10-Q you will also see that two customers accounted for 49% and 17% of accounts receivable at quarter end.

Mark Long23:31

I want to provide more context for this.

Mark Long23:46

Concentration at this level is a consequence of the scale at which AI infrastructure is now being built. A single deployment today can exceed our total quarterly revenue from just one year ago.

Mark Long23:55

We expect concentration to stay elevated while these build outs run and to moderate as our enterprise and sovereign businesses grow.

Mark Long24:10

What matters alongside the concentration is the quality of the exposure. So let me give you that. Deferred revenue increased by approximately $3.1 billion during the quarter.

Mark Long24:16

An overwhelming majority of which reflects customers paying in advance of delivery.

Mark Long24:27

Days sales outstanding improved from 59 days to 36 days. We recorded no material credit losses in the quarter.

Mark Long24:42

On large deployments we frequently require deposits and often bill against delivery milestones. We evaluate counterparty credit before committing manufacturing capacity and critical components.

Mark Long24:52

And we maintain a 1.8 billion dollar receivables purchase facility that gives us flexibility on both cash timing and credit exposure.

Mark Long25:25

We have declined business in this market on terms we were not comfortable with and in the current environment I expect we will continue to make that choice non-GAAP gross margin was 12.8% that is 200 to 240 basis points above our guidance range of 10.4% to 10.8% and 330 basis points above the first quarter of last year on a gap basis gross margin was 12.7%

Mark Long25:40

It is also down 480 basis points from the 17.6% we reported in Q4. and I want to take that apart because a single factor explanation would be misleading.

Mark Long25:59

The key factor impacting gross margin was the Q1 AI revenue mix which increased from 59% in Q4 to 71% in Q1. The customer and product mix within our Q1 business was weighted toward large scale AI deployments.

Mark Long26:05

Which carry lower gross margins than the more diversified enterprise and channel business.

Mark Long26:18

Benefits from tariff relief and lower inventory reserves during the quarter were largely offset by certain lower margin deferred revenues which were recognized during the quarter.

Mark Long26:24

I want to be precise about one point because I know how the mix figures can be read.

Mark Long26:34

The sequential decline is not evidence that AI platform revenue lacks margin. It reflects which customers took delivery in which quarter.

Mark Long26:55

The clearest way to see the underlying trend is to look at the last two quarters together which neutralizes the deferral timing. Across Q4 and Q1 combined revenue was approximately 31.1 billion dollars and non-GAAP gross margin was approximately 14.5%.

Mark Long27:13

For the same two quarters a year earlier revenue was approximately 10.8 billion dollars and gross margin was approximately 9.5%. On that normalized basis revenue nearly tripled and gross margin improved by roughly 500 basis points.

Mark Long27:19

We continue to demonstrate significant operating leverage.

Mark Long27:27

Revenue grew 298% year over year against an 89% increase in non-GAAP GAAP operating expenses.

Mark Long27:37

Gap operating expenses were 477 million up 67% year 67% year over year and 5% sequentially.

Mark Long27:46

Non-GAAP operating expenses were 384 million dollars up 89% year over year and 8% sequentially.

Mark Long28:00

The sequential increases reflect higher headcount costs and research and development spending as we invest in multiple new platforms for AI data center and enterprise applications.

Mark Long28:33

Non-GAAP operating margin was 10.9% compared with 14.3% in Q4. Here too, the two quarter view is more useful one. Across Q4 and Q1 combined, non-GAAP operating expenses were approximately $741 million or about 2.4% of revenue and non-GAAP operating margin was approximately 12.1% compared with roughly 5.4% for the same two quarters a year earlier.

Mark Long28:45

We intend to keep investing in R&D, field service, and our global footprint and we expect operating expenses to keep growing well below the rate of revenue.

Mark Long29:03

Other income and expense was a net expense of $34 million consisting of $49 million of interest expense and other expense offset by $83 million of interest expense on our convertible notes and revolving credit facilities.

Mark Long29:14

The tax provision was $435 million on a gap basis and $455 million on a non-GAAP basis.

Mark Long29:18

With an effective tax rate of 21.4% on both bases.

Mark Long29:31

I would like to expand on some points made in the last earnings call regarding earnings per share. Because our capital structure now has a moving part that I do not think is well understood. understood.

Mark Long30:08

We calculate earnings per share using the two class method. which reflects the mandatory convertible preferred stock we issued in Q4 that instrument carries a fixed dividend of approximately 75 million dollars per quarter and converts to common stock in June 2029 between now and then both the dividend and the allocation of earnings to that participating security produce earnings available to common shareholders this quarter by approximately 312 million dollars in aggregate.

Mark Long30:17

Gap diluted earnings per share were 1 dollar and 75 cents against guidance of 89 cents to 98 cents.

Mark Long30:33

Non-GAAP diluted earnings per share were 1 dollar and 81 cents against guidance of a dollar one to a dollar 10. Gap basic earnings per share were 1 dollar and 92 cents.

Mark Long31:38

Now to working capital. which I think will help explain key elements of how we operate our business. our cash conversion cycle improved from 149 149 days to 97 days a 52 day improvement in a single quarter at our Q1 revenue run rate that difference represents roughly 10 billion dollars of working capital the business would otherwise have needed to fund the cash flow statement shows this we used three 434 million dollars of cash in operations on 19.9 billion of revenue for all of fiscal 2026 we used 6.8 billion dollars on 39.1 billion dollars of revenue capital expenditure in the quarter was 47 million dollars so so free cash flow was negative 481 million dollars against negative 7 billion dollars for fiscal 2026.

Mark Long31:45

Let me break down the 52 days including both the positives and the areas for potential improvement.

Mark Long32:01

Days of inventory improved 45 days to 74. Day sales outstanding improved 23 days to 36. helped by faster collections and by customer prepayments.

Mark Long32:35

Days payable outstanding moved against us from 29 days to 13 which consumed roughly three billion dollars and reflects timing of payments to suppliers in a supply constrained environment the largest single driver was customer prepayment deferred revenue increased approximately 3.1 billion dollars in the quarter accounts receivable grew 3.6 billion dollars and inventory grew 2.5 billion dollars to support the revenue ahead of us.

Mark Long32:41

And prepayments funded most of that build.

Mark Long32:58

We expect the cash conversion cycle for the current quarter to be within the band of plus or minus 10% versus Q1 which enables us to appropriately manage our working capital while also executing against attractive market opportunities.

Mark Long33:34

We ended the quarter with $6.9 6.9 billion dollars of cash and cash equivalents bank borrowing and convertible notes totaled 8.6 billion dollars for net debt of 1.7 billion dollars compared with 1.2 billion dollars at the end of Q4 inventory was 15.1 billion dollars up from 12.9 billion dollars built to support the revenue we expect in coming quarters we are in compliance with all covenants at quarter end

Mark Long34:03

On capital structure more broadly we are starting from a strong foundation the 5.6 billion dollars we raised in June was raised specifically to fund the working capital behind the orders we are now delivering as we identify high growth high quality growth opportunities we will optimize our capital structure to support them and we will do that in ways that fortify the balance sheet without taking on unnecessary costs.

Mark Long34:16

That means matching the duration and the form of our funding to the working capital and the assets it supports and being deliberate about when and whether we access markets.

Mark Long34:33

I will be transparent with you every quarter about dilution maturities and available capacity we ended the quarter with a record backlog providing stronger visibility for the current quarter and the remainder of the fiscal year

Mark Long34:57

Turning to guidance. For the second quarter of fiscal 2027 we expect net sales of 19.5 billion dollars to 21.5 billion dollars and gross margin of 12% to 12.5%. We expect gap diluted earnings per share of 1 dollar and 59 cents 1 dollar and 59 cents to 1 dollar and 83 cents.

Mark Long35:04

And non-GAAP diluted earnings per share of 1 dollar and 66 cents to 1 dollar and 90 cents.

Mark Long35:06

That

Mark Long35:21

That guidance assumes gap operating expenses of approximately 455 million dollars including approximately 102 million dollars of stock based compensation which is excluded from non-GAAP.

Mark Long35:50

We expect other income and expense including interest expense to result in a net expense of approximately 58 million dollars gap and non-gap tax rates of approximately 21% and gap diluted share count of approximately 753 million and a non-GAAP diluted count of approximately 769 million.

Mark Long35:57

Preferred dividends of approximately $75 million and capital expenditure of 70 million to 80 million dollars.

Mark Long36:09

For the full fiscal year we are raising our revenue outlook to 72 billion to 82 billion dollars from 65 billion to 72 billion dollars.

Mark Long36:16

We expect full year gross margin of 11.8% to 12.2%.

Mark Long36:19

Let me connect that to the quarter we just reported. reported.

Mark Long36:27

Q1 included approximately 2.3 billion dollars of catch up from prior period deployments.

Mark Long36:37

So underlying revenue was approximately 17.6 billion dollars. The full year range does not assume that catch up repeats.

Mark Long36:50

It does assume continued sequential growth in underlying demand and it reflects materially better visibility into customer deployment schedules than we had 90 days ago.

Mark Long37:12

Our business continues to strengthen and momentum is building for fiscal 2027. although we are gated by supply constraints and data center readiness and we are focused on disciplined execution credit worthy counterparties and expanding our higher margin revenue streams.

Mark Long37:30

A margin I want to be straightforward about what the full year range implies. With Q1 at 12.8% and Q2 guided to 12 to 12.5% the full year range implies gross margin in the second half below the first half. half.

Mark Long37:47

That is a mix effect we expect AI solutions to move toward the upper end of the 70 to 70 to 80% range as the large deployments in our backlog ship and those carry lower gross margin than enterprise and channel verticals.

Mark Long38:08

Within each category we expect margins to hold or improve. What governs the range is not demand and it is not our ability to build. It is the pace at which customer facilities become ready to receive what we have already manufactured and the availability of key components.

Mark Long38:23

The binding constraints on AI build outs across this industry right now are land, power, and data center shells. We have better visibility into that than we did and we will update you as the year progresses.

Mark Long38:43

Let me close where I started. This was a quarter of strong growth with high quality customers. Revenue nearly quadrupled year over year gross margin came in well above our guidance and customer prepayments funded most of the working capital needed to deliver it.

Mark Long39:21

Behind those results is a broad and innovative portfolio from DCBBS rack scale and liquid cooled systems to enterprise storage edge and software that positions us for the most demanding workloads and the widest range of use case in the AI build out my focus going forward is the one I described at the outset financial discipline so that growth is profitable growth transparency so that you can see how this business works from quarter to quarter including the timing effects that moves our numbers

Mark Long39:44

Deeper engagement with all of our stakeholders working capital management building on the improvement in our cash conversion cycle this quarter and a capital structure optimized to support high quality growth from a strong foundation I'm looking forward to meeting many of you over the coming months Michael we are ready for questions

Michael Staiger39:47

Great Jen let's poll for questions

Questions and answers

Operator40:05

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again.

Operator40:20

We ask that you pick up your handset when asking a question to allow for optimum sound quality. if you are muted locally please remember to unmute your device please stand by while we compile the Q&A roster

Operator40:28

Your first question comes from the line of Katherine Murphy with Goldman Sachs your line is open please go ahead

Katherine Murphy40:54

Great thank you for the question and great to connect first I want to ask just about the raised revenue outlook understand that land power and data center shells are the binding constraints here but wanted to understand in your full year outlook and then in your pipeline what share of those projects do you have line of sight into the off-takers and the committed volume there and then I have a follow-up question thank you

Charles Liang41:36

Yeah I mean as you know the power and even GPU some component shortage right but because our solution outperform the industry solution so especially with our DCBBS DCBBS not just provide a data center hardware building block by software and service help customer build data center quicker and also keep their computing power uptime much better so indeed we continue to gain more customer and gain market share so we feel pretty optimistic for continual market share growth.

Katherine Murphy41:56

And then as a follow-up, could you talk more about the customer prepayments in the quarter and how we should think about that continuing to support your working capital efficiency going forward? Is that something we can expect in the value that DCBBS and the market share gain strategy that you've talked about?

Charles Liang42:25

Yeah, as you know, I mean now cash flow a little bit tight to a lot of company but at the Super Micro because we have a better total solution again our DCBBS that attract a lot of customer so basically we see a good sign most our customer able to pay us on time and we feel very solid to continue grow our business.

Charles Liang42:26

Mark you may add something.

Mark Long43:26

Yeah I I think the you know the advantage as Charles pointed out is really around the quality of the customer base. So very large credit worthy customers who you know pay very quickly they provide you know very strong cash flow for us but the broad customer base is providing more prepayments and that discipline enables us to fund a lot more of this working capital and you know I think you should expect that to continue so you know we feel like we're in very good position the company has done a lot since they raised capital in the summer and since the cash conversion cycle has improved so working capital efficiency has gone up substantially

Charles Liang44:08

Yeah as we just share we improve our business in terms of cash flow in two area one is we improve inventory and production turnaround time from about 100 day to now 70 day and we believe we will be able to continue to improve that production and inventory turnaround time second phase second point like Mark just say we getting have a higher quality customer and those customer pay on time or even pay quick turnaround so we feel very solid in this area

Operator44:20

Your next question comes from the line of Ananda Baruah with Loop Capital. Your line is open please go ahead

Ananda Baruah45:38

Yeah thanks guys for taking the question congrats on the progress and Mark welcome I have yeah two if I could I guess the first one Mark is just on the growth margin and the way to think about the dynamics that are layering in to the through the balance of the fiscal year correct me if I'm wrong here I actually have to hit the midpoint of your guide while down in the second half of the year sort of flat around 12% the next three quarters so correct me if that's wrong and then really the question is is you talked about AI mix you know sort of you know being a factor in there what's could you share a little bit about inside of the AI AI customer base like what are the moving parts on the margins I I think Charles in the past has talked about improvement in AI margins you know sort of as in the go forward and just interested to know if you know what the dynamics in play are there as you go through the rest of the fiscal year inside the AI margins and I have a quick follow-up thanks

Charles Liang46:00

Yeah, as I just shared, in last three quarter or four quarter, our production time and also our production quality year dramatically improve and that make our turnaround time quicker and make a customer happier.

Charles Liang46:25

Because of a better TTD, and better TTO help customer time to online. So customer appreciated that plus our DCBBS software and service that help customer further and better quality customer we continue to gain more customer especially including the enterprise agentic

Charles Liang46:31

Customer so all those are positive impacting our business

Mark Long47:09

Yeah and I think just to kind of build on what Charles said in terms of the guide for the year what you're seeing is you know we have good line of sight and now the business is stabilizing and kind of has this foundation in this 12% gross margin range with room as we continue to diversify our customer base and our product sets to expand those gross margins further.

Mark Long47:35

So you know the precise modeling you know you're relatively close on your original question but you know for us the visibility is very strong and as Charles pointed out the gross margin across all of our customer categories has improved.

Mark Long47:59

That's really the important thing and this is a function of what Charles was talking about in terms of our great engineering our great product set and the execution of the team so you know we feel like we're in a very good position at you know this scale and we see enormous opportunities going forward

Mark Long48:01

Yeah like our

Ananda Baruah48:01

Super helpful.

Mark Long48:22

Yes like our DCBBS, we provided not just data center building block solution, hardware, components, but also software also help customer kind of keep uptime so all those almost become one of our business mode.

Mark Long48:31

So customer like our product more and more customer like our solution.

Ananda Baruah48:50

That's really great context guys and the quick follow up is what the reasonable expectation for opportunity with the CPU business you know just with all the structural tailwinds as you go through the fiscal year here and that's it for me thanks

Charles Liang49:19

Yeah as you know agentic AI is getting very popular so we're getting lots of customer including lots of enterprise customer they are buying our CPU based solution including Intel CPU based AMD including NVIDIA right our NVIDIA solution is ready and including ARM solution so we see a much stronger CPU demand now and looking forward.

Operator49:31

Your next question comes from the line of Joseph Cardoso with JPMorgan. Your line is open please go ahead.

Joseph Cardoso50:19

Hi thanks for the questions here and Mark looking forward to working with you um maybe just for my first if I could you know it sounds like in your prepared remarks you're not including any more catch up or deferred deliveries in the guidance but I guess maybe first question here is just can you just clarify if there are still deferred deliveries that are remaining and just not embedded in the outlook and then the second portion of that question is more as we kind of strip that out of the numbers you're still kind of implying a moderation in growth coming into the second half of the year versus the first half so maybe but maybe can you just walk us through the dynamics that are influencing that um and if it has anything to do maybe with the concentration on with your largest customer here maybe fading going into the back half and then I do have a follow-up thank you

Mark Long51:00

Yeah, I think the key point about deferred revenue historically kind of looking back was that there was you know this set of deliveries and deployments that had been delayed and they had been carried over from prior quarters in you know a typical quarter you will have some revenue recognition based on deliveries and you may have one or two deployments that are delayed but you know those were that that was a larger than typical amount of revenue that had been deferred.

Mark Long51:44

And when that was released that caused you know a number of things revenue went up and as we mentioned that was margin dilutive on an overall basis but going forward we don't expect the same types and the same magnitude of delayed deployments through the deferred revenue and most of the deferred revenue is either customer prepayments or you know we have our service and software revenue that you know we typically defer over a number of periods.

Charles Liang52:32

Yeah the good thing is you know since we introduced DCBBS some of our customer and some of even our internal people are a little bit confused. so that's why they kind of have a certain argument about when to recognize but now our DCBBS is much mature business so not just our internal people now familiar with our DCBBS and customer understand which service they buy which service they did not buy so we should not cover that so since it's getting much clear much mature so that will help our deferring revenue problem

Mark Long53:11

Yeah and the second question regarding guidance implying moderation in growth in the second half what you're really hearing is just our sort of range of expectations based on the supply constraints and you know trying to gauge where the data center readiness for large deployments will land us but as we mentioned in the prepared remarks demand remains extremely strong and especially the interest in the DCBBS product portfolio.

Joseph Cardoso54:03

Nope got it very clear and then maybe as my second one just dovetailing off of that a little bit um and maybe this is a two-parter as well but you know you're talking about maybe shortages here going into or kind of the supply tightness I guess in terms of the total ecosystem can you maybe just touch on what's the most binding constraint as you think about the 2Q and second half outlook is it largely associated with the GPUs or is it other elements on the component side and then the second question is just more around obviously within this backdrop of shortages pricing has obviously been a strong element in terms of pass through any way you can kind of help us think through as we think about your 27 outlook how much of the growth is being driven by units as opposed to cost pass through thank you

Charles Liang54:23

Yeah very good question I mean the reason why we have a conservative number for the annual revenue 72 to 82 billion because we are concerning about some key components shortage and also the macro economy.

Charles Liang54:47

So if the component shortage won't be a big issue and if the macro economy is healthy, then for sure our second half will be much bigger than our first half. So we hope so and that's why we are very optimistic to see our second half have a much better performance than first half.

Charles Liang54:47

And if that's the case.

Charles Liang54:53

72 to 82 billion become very, very conservative.

Mark Long55:04

Yeah, and you know, I think your point about the growth in ASPs really driven by the

Mark Long55:26

The cost of key components that is been going up sometimes more than quarterly you know our outlook does not for the second half does not you know encompass significant growth in ASPs.

Mark Long55:57

So you know again we have a relatively conservative approach there and we're really looking at the details of customer deployments you know what they need which product sets what our production capacity is and kind of how to manage that and as Charles pointed out our demand far outstrips the availability of key components.

Operator56:07

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open. Please go ahead.

Ruplu Bhattacharya56:32

Hi. Thanks for taking my questions. And Mark, congrats on the role and I look forward to working with you. Maybe I'll ask you my first question. As you look out over the next 12 months, do you think Super Micro has enough cash and cash flow to self-fund the investments that are needed to support the strong growth that you're seeing what would cause you to raise more capital and do you have a preference for debt versus equity and I have a follow-up.

Charles Liang56:44

Very good question. As you know, by end of the last quarter, our cash is 6 billion

Charles Liang56:44

Yeah,

Charles Liang57:08

We never have so much cash in the bank. So indeed the cash flow at this moment we don't worry even in second half continue to grow strongly if the macro economy is healthy, our cash flow is in much strong position than before ever.

Mark Long58:35

Right. Yeah, as Charles pointed out, I mean, starting with $6.9 billion of cash puts us in a very good position as we mentioned our working capital efficiency has gone up our ability to fund our working capital needs through our you know focus on high quality customers and some customer prepayments that puts us in a great position so so that we can optimize our capital structure we can think about trade-offs if we have very attractive opportunities that that require incremental funding we have our 1.8 billion dollar working capital facility and you know we have the opportunity to kind of access other markets as you point out both the credit and equity markets at this point we don't have any plans to consider equity raises and you know as far as the debt markets I think we would look at kind of you know what was available and how it would best position the company for continued success and provide us with the right you know leverage structure.

Operator58:52

Due to time constraints we'll be taking one final question. This question comes from the line of George Notter with Wolfe Research. Your line is open please go ahead.

Brandon Nispel59:14

Hi guys it's Brandon Nispel on for George. I guess just a question on what's changed in your conversations with customers in the last 90 days in order to get this better visibility like is this a feature of today's market like customers are extending the forecast timelines that they're giving you or is this sort of more of a shift in how you're managing the business?

Charles Liang59:37

Yeah, as we mentioned, we have a strong back order and so we have a choice to select healthy customer and customer order quality customer quality very important to us.

Charles Liang59:44

So we have a chance to selective from some point of view.

Mark Long59:58

Yeah, and I think as Charles pointed out we are getting better visibility from a number of our customers some very very large some

Mark Long1:00:06

Moderately large and we're getting you know visibility across geographies and so

Mark Long1:00:07

Many enterprise

Mark Long1:00:22

Yes and the growth of the enterprise business is another factor that will you know provide enhanced visibility and stability to our overall revenue stream

Closing

Operator1:00:33

We have reached the end of the Q&A session. this concludes today's call thank you for attending you may now disconnect