Lululemon Athletica Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 29, 2024

There are 11 speakers on the call.

Operator

you for standing by. My name is Cole, and I will be your conference operator today. At this time, I would like to welcome everyone Super Micro Computer fiscal 2nd quarter 2024 results. With us today, Charles Liang, Founder, President and Chief Executive Officer David Wicken, CFO and Michael Staiger, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise.

Operator

It has been asked that we keep ourselves to one question and one follow-up question. And with that, I'd like to pass the call over to Michael Staiger.

Speaker 1

Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the Q2, which ended December 31, 2023. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer and David Wiegand, Chief Financial Officer. By now, you should have received a copy of the news release from the company that was distributed 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 the Investor Relations section of the company's website under the Events and Presentations tab. We've also published management's scripted commentary on our website.

Speaker 1

Please note that some of the information you'll hear during our discussion today will consist of forward looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook, including guidance for Q3 of fiscal year 2024 and the full fiscal year 2024. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. Can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10 ks filing for fiscal 2023 and our other SEC filings. All of these documents are available on the Investor Relations page of Super Micro's website. We assume no obligation to update any forward looking statements.

Speaker 1

Most of today's presentation will refer to non GAAP financial results and business outlook. For an explanation of our non GAAP financial measures, Please refer to the company's presentation or the press release published earlier today. In addition, a reconciliation of GAAP to non GAAP results is contained in today's press release and the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q and A session for sell side analysts to ask questions. I'll now turn the call over to Charles.

Speaker 2

Thank you, Michael, and good afternoon, everyone. I'm delighted To share our Q2 results, which show record breaking performance for Shiba Mago. We achieved revenue of RMB 3,660,000,000, a 103% increase from last year and earnings per share of $5.59 This is our 4th quarter ever with over $3,000,000,000 of revenue. More importantly, this single quarter's revenue surpassed our annual revenue for 2021. This fantastic quarterly result was driven by strong demand and improving supply conditions for GPU and related key system components.

Speaker 2

Our rack scale plug and play IP and AI total solution continues to gain more new customers along with their confidence in Super Micro as their go to infrastructure partner. Our AI rack scale solutions, especially the deep learning and analog M optimized Based on NVIDIA, HGX, H100 and K continue gaining high popularity. The demand for AI Inferencing Systems and mainstream computer solutions have also start to grow. The exciting news is that finally we are entering an accelerating demand phase From many more customer wins, we support to support faster growth. We have increased our working capital recently by raising about $600,000,000 with an equity offering.

Speaker 2

Moreover, we have other programs to increase our cash flow without additional equity dilution to support short and long term sustainable growth. Overall, I feel very confident that This AI boom will continue for another many quarters, if not many years. And together with the related Inferencing and other computing ecosystem requirements demand and last for even many decades to come. We met Co Disc and AI Revolution. Let's go over some key financial highlights.

Speaker 2

First, fiscal Q2 net revenue totaled RMB3.66 billion, up 103% year on year and up 73% quarter on quarter, exceeding the top end of our original guidance of RMB2.9 billion for December quarter. Second, fiscal Q2 non GAAP earnings of $5.59 per share were well above $3.26 a year ago and exceed the guidance range of $4.40 to $4.80 further demonstrating continued strong operation leverage. Economic of scale is important to us for continued strong growth. Supermicro is at a forefront or AI revolution, Where the pace of innovation is accelerating, we are heading the race By developing the most innovative AI infrastructure on many platforms at rack scale for almost NA Industry and for NA market vertical. As the market leader, we have been preparing to More than double the size of our current AI portfolio with the Kanshoon, NVIDIA, CG1, CG2, Horace Hopper Superchip, H220 and B100 CPUs are GPUs, Lenovo TS Infinixion optimized GPUs, AMD, MI300X, Mi 3 and A and Intel Gaussi II and Gaussi III.

Speaker 2

All these new platforms will be ready for high volume production in the coming months and quarters. Moreover, we are adding further optimized new architectures for the Coming NVIDIA GPU product lines. Our AMD MSRX system are sampling now And our Intel Gauthi 3 system is coming soon. More importantly, we are continuing to invest and innovate in data center and enterprise liquid cooling technology to make sure this high power AI platform are in line with our building computing methodology, while improving the performance, efficiency and reliability of system in the data center. As a total IP solution innovator, manufacture and provide more and more of the major deployments is being delivered as Integrated RAC solution, particularly for the AI cluster deployment, servers, networking, storage, Security features and software are optimized, validated, delivered and serviced as an integrated a rack cluster from Shibuya Mako's manufacturing facility worldwide.

Speaker 2

Leveraging our building block architecture and operating Production Automation System, we can deliver optimized rack solution with come to market and quality advantages while our customers more efficiently than competition. Our TPD, time to delivery factor have been in continuous improvement. But this June quarter, we will have high volume dedicated capacity For manufacturing 100 kwatt to 120 kwatt rack with deep cooling capability, Providing DLLC direct attached liquid cooling rack capacity up to 1500 racks per month And our total rack production capacity will be up to 5,000 racks per month by then. At the same time, our high volume clean room rack scale production facility will be ready to service critical customer medicine. The rapid growth of our business is driven the need of additional R and D solution optimization, manufacturing and service capacity.

Speaker 2

Today, our production utilization rate is about 65% across our USA, Netherlands and Taiwan facilities, and they are quickly finished. To address this immediate capacity challenge, we are adding 2 new production facilities and warehouse near our Silicon Valley headquarter, which will be operating in a few months. The new Malaysia facility will focus on expanding our building blocks with lower cost and increased volume, while other new facility will support our annual revenue capacity above $25,000,000,000 To summarize, our record quarterly performance demonstrate our building block, Right scale, plug and play IT and AI industry leadership, which continues to accelerate and shows line of strong market share gains, the continued strength of existing customer build and ramp of newly acquired customers and robust pipeline of new products coming In 2024, giving me confidence that physical Q3 revenue will be in the range of $3,700,000,000 to $4,100,000,000 Additionally, we are expecting continued strength for the second half of fiscal twenty twenty four and now forecasted revenue for our full fiscal year ending in June to be in the range of $14,300,000,000 to $14,700,000,000 We are in overdrive to accelerate the Supermicro 3.0 business model with this AI boom. In the meantime, we are preparing ourselves for the next phase of Super Micro Business Growth, which is Super Micro for DAO and its expanding TAM.

Speaker 2

Now is certainly the most exciting time yet for Chipot Micro. Before passing the call to David Wiegand, our CFO, I want to thank again to our partners, our customers, our Supermicro employees and our shareholders for your strong support. Now let me pass to our CFO, David, for more financial details.

Speaker 3

Thank you, Charles. Fiscal Q2 twenty twenty four revenues were $3,660,000,000 up 103% year over year and up 73% quarter over quarter. Revenues were higher than our initial guidance of $2,700,000,000 to $2,900,000,000 and slightly above our recently updated guidance of $3,600,000,000 to $3,650,000,000 Our growth was driven by demand from new and existing customers for our leading AI and rack scale total IT solutions and an improving supply chain. Next generation AI and CPU platforms continue to drive strong levels of design wins. Orders and backlog from top tier data centers, emerging cloud service providers, enterprise channel and edge IoT telco customers.

Speaker 3

During Q2, we recorded $1,480,000,000 in the enterprise channel vertical, representing 40% of revenues versus 43% last quarter. This was up 55% year over year and up 62% quarter over quarter, driven by enterprise AI and CPU upgrade programs. The OEM appliance and large data center vertical revenues were $2,150,000,000 representing 59 percent of Q1 revenues versus 55% last quarter, was up 175% year over year and up 83% quarter over quarter. 2 existing CSPlarge data center customers represented 26% 11% Of total revenues for Q2, emerging 5 gs telco edge IoT revenues were 35,000,000 or 1% of Q2 revenues. Growth was driven by AI, GPU and rack scale total IC solutions, which again represented over 50% of total revenues this quarter with AI GPU revenues in both the enterprise channel and the OEM ApplianceLarge Data Center Verticals.

Speaker 3

Server and storage systems comprised 94% of Q2 revenue and subsystems and accessories represented 6%. ASPs increased on a year over year and quarter over quarter basis, driven by product and customer mix. By geography, the U. S. Represented 71% of Q2 revenues Asia 18% Europe 8% and the rest of the world 3%.

Speaker 3

On a year over year basis, U. S. Revenues increased 139%, Asia increased 98%, Europe decreased 8% and the rest of the world increased 67%. On a quarter over quarter basis, U. S.

Speaker 3

Revenues increased 61%, Asia increased to 191%, Europe increased 51%, and the rest of the world increased 37%. The Q2 non GAAP gross margin was 15.5%, which was down quarter over quarter from 17% as we continue to focus on winning strategic new designs and gaining market share. Turning to operating expenses. Q2 OpEx on a GAAP basis increased by 6% quarter over quarter and 58% year over year to 193 $1,000,000 driven by higher compensation expenses and headcount. On a non GAAP basis, Operating expenses increased 18% quarter over quarter and 41% year over year to 153,000,000 q2 non GAAP operating margin was 11.3% versus 10.8% last quarter as we benefited from operating leverage driven by higher revenues.

Speaker 3

Other income and expenses for Q2 was a net expense of approximately $16,000,000 consisting of $8,000,000 in interest expense and a loss of $8,000,000 principally from foreign exchange. Interest expense increased sequentially as we drew down on short term bank credit facilities for working capital during the quarter. The tax provisions for Q2 was $61,500,000 on a GAAP basis and $71,100,000 on a non GAAP basis. The GAAP tax rate for Q2 was 17.3 and the non GAAP tax rate was 17.8. Q2 non GAAP diluted EPS of $5.59 exceeded the high end of our initial guidance of $4.40 to $4.88 and slightly above our recently updated guidance of $5.40 to $5.55 due to operating leverage.

Speaker 3

Cash flow used in operations for Q2 was $595,000,000 compared to cash flow generated by operations of $271,000,000 during the previous quarter. Strong profitability and A higher level of accounts payable was offset by higher inventory and accounts receivable due to build plans for Q3 and the timing of shipments during Q2. CapEx was $15,000,000 for Q2 resulting in negative Free cash flow of $610,000,000 versus positive free cash flow of $268,000,000 last quarter. During the quarter, we executed an equity offering and raised approximately $583,000,000 in net proceeds after underwriting discounts and other issuance costs from the sale of 2,300,000 shares at a price of $2.62 per share. The proceeds will be used to strengthen our working capital, enable continued investments in R and D and expand global capacity to fulfill strong demand for our leading platforms.

Speaker 3

The closing balance sheet position was $726,000,000 while bank debt was $376,000,000 resulting in a net cash position of $350,000,000 versus a net cash position of $397,000,000 last quarter. Turning to the balance sheet and working capital metrics compared to last quarter. The Q2 cash conversion cycle was 61 days versus 86 days in Q1. Days of inventory decreased by 24 days to 67 days versus the prior quarter of 91 days due to the timing of shipments during the quarter. Days sales outstanding was down by 14 days quarter over quarter to 29 days, while days payables outstanding decreased by 13 days to 35 days.

Speaker 3

Now turning to the outlook. We expect a strong March quarter as we continue to gain momentum With new and existing customers for our AI and Rack Scale Total IT solutions, for the Q3 of fiscal 2024 Ending March 31, 2024, we expect net sales in the range of $3,700,000,000 to $4,100,000,000 GAAP diluted net income per share of $4.79 to $5.64 and non GAAP diluted net income per share of $5.20 to $6.01 We expect gross margins to be slightly lower than Q2 levels. GAAP operating expenses are expected to be approximately $201,000,000 and include $39,000,000 in stock based compensation expenses that are not included in non GAAP operating expenses. The outlook for Q3 Of fiscal year 2024, diluted GAAP EPS includes approximately $28,000,000 and expected stock based compensation expenses, net of tax effects of $14,000,000 which are excluded from non GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to be a net expense of approximately 9,000,000 The company's projections for Q3 GAAP and non GAAP diluted net income per share assume a GAAP tax rate of 13.8%, a non GAAP tax rate of 15.8 percent and a fully diluted share count of 60,100,000 for GAAP $61,000,000 for non GAAP.

Speaker 3

We expect CapEx for Q3 to be in the range of $18,000,000 to $21,000,000 in a range of $105,000,000 to $115,000,000 for the fiscal year 2024. For the fiscal year 2024, which ends June 30, 2024, we are raising our guidance for revenues from a range of $10,000,000,000 to $11,000,000,000 to a range of $14,300,000,000 to $14,700,000,000 Michael, we're now ready for Q and A.

Operator

Our first question is from George Wang with Barclays. Your line is now open.

Speaker 4

Hey, guys. Congrats on the quarter and a strong guide. I have two questions. Firstly, can you talk about kind of supply versus demand? Obviously, for the December quarter, probably driven by both kind of improving supply and also strong demand.

Speaker 4

So If you can, maybe you can talk about backlog level and also on the supply side. Are there still ongoing constraints right now?

Speaker 2

Yes. Thank you for the question. Indeed, the demand still stronger than supply. So we have more supply. Will be able to ship more and we are very happy to continue to grow our capacity, work out Payless even higher support, so to grow business even quicker.

Speaker 4

Okay. And quickly a follow-up just on the liquid cooling. You talked about kind of expanding to 1500 rack 12 months after June this year. And maybe you can talk about your expectation for the total production mix from liquid crude racks by year end. And also maybe you can talk about kind of the difference so the config within the liquid cooling.

Speaker 4

I know you guys have some emulsion cooling and air to liquid cooling. So maybe you can double click on this thematic topic going forward.

Speaker 2

Thank you, George, for the question. Indeed, the Decor cooling, we are leading the industry. So we have a huge capacity ready and have very mature total solution ready. But lots of customers, already like deep coding, but their data center needed some more time to be ready. I mean, their infrastructure needed some more time.

Speaker 2

So we believe, I think, Kuuling will be the trend And we continue to make ourselves ready and try our best to support the customer, including provide some help Today, our data center infrastructure. So I believe, they're recruiting a percentage work on the other globe. But at this moment, Most of the shipping is still air cooled.

Speaker 4

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

Speaker 2

Thank you.

Operator

Our next question is from Samik Chatterjee with JPMorgan. Your line is now open.

Speaker 5

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

Speaker 5

Thank you.

Speaker 3

Sure. Thanks, Samik. So when we win a new customer, We always try to go in and out. And so we go into the organization and try to spread out into different divisions. And so in order to do that, as we take on new customers, we do evaluate and try to win the business, which requires us to be competitive.

Speaker 3

And so we always are balancing in the interest of shareholder value, how to maximize that. And so at this time, we are growing really quickly. And in order to do that, in order to take market share, We will take opportunities by being more competitive on pricing.

Speaker 2

The question is when we continue to grow our economical scale, operation Margin indeed will be still able to keep in a healthy position.

Speaker 5

Yes. Got it. Got it. And then just more near term question. When I look at the revenue guide for 3Q and 4Q, There's a step up here in revenue of about sort of call it $500,000,000 a bit less going from 2Q to 3Q and then a bigger step up to get to the point of the annual guide into 4Q, how much of that is driven by just being a bit more cautious about when supply comes in and pushing that revenue guide a bit more to the 4Q?

Speaker 5

Or is that really what the visibility currently tells you in terms of supply? I'm just trying to get sort of what's driving the cadence from 2Q to 3Q to 4Q and the guide that you provided today? Thank you.

Speaker 3

Yes. So, Samik, we have a very large and growing backlog, which grew again this quarter. And so really, as Charles mentioned earlier, our only constraint is Supply, however, the good news is supply is improving. And so to your point, we have to be Somewhat conservative because we are constrained still by supply.

Speaker 5

Good. Thank you. Thanks for taking my questions.

Operator

Our next question is from Nehal Chokshi with Northland. Your line is now open.

Speaker 6

Yes, thanks and great impressive guidance and Thanks for explanation regarding the dynamic on the forward guidance for both March quarter and plus the 2Q guide. Looking at the incremental revenue for the December quarter, Dave, you already alluded to this, you're making shareholder accretive decision. So that's what's driving the tick down in the gross margin, yet your operating margin has improved Q over Q. And so just to be clear, When you're talking about making shareholder accretive decisions, it's still with respect to current revenue, not just simply looking at future Free cash flow is associated with the future revenue follow on from these lower margin opportunities. Is that correct?

Speaker 3

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

Speaker 6

Got it. Okay. And then did you review the 10% revenue customers for the quarter?

Speaker 3

We did. Yes, we said we had 2, 125 and 111, both in the CSP large data center vertical.

Speaker 6

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

Operator

Our next question is from Jon Tanwanteng with CJS Securities. Your line is now open.

Speaker 7

Hey, good afternoon. Thank you for taking my questions and really congratulations on the fantastic growth. Charles, my first question is for you. I was wondering what gives you the confidence into growth beyond this year? You mentioned inference, the ecosystem potentially years decades of demand.

Speaker 7

Where is the visibility coming from? What are you seeing in your backlog, in your order books and in your conversations with customers that give you that confidence?

Speaker 2

Yes. Thank you for the question. Yes, I mean other than generative, deep learning segment continue to grow very strong. Our inferencing opportunity in general CPU customer base also growing. So With AI continue to be more popular indeed, so many verticals around the world need more efficient solution as well, including private cloud, private kind of data center and even push on AI.

Speaker 2

So we are approaching continue to grow in all different kind of direction And we see positive feedback, a committed feedback.

Speaker 7

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

Speaker 3

Sure. So we set out a target back in March of 2021 of 14% to 17%, but and that's and we've actually done pretty well against that target. But one thing I'll say is that we have a lot of there's a lot of initiatives that play into our favor. Number 1, We're doing a lot in terms of expansion to lower our cost envelope. And number 2, we are our advantage is our building block solutions.

Speaker 3

And what that means is, We're the fastest to market because of the way that we have architected our products. So what that means is there's a lot of new technologies that are coming out From many different technology providers and we expect to again, As we were with AI, be first to market with those. And that first to market advantage helps us helps to differentiate ourselves as we come out with a complete set of solutions. So we think that's another thing that will that is always going to play to Supermicro's advantage.

Speaker 2

Yes, especially we have a so broad billion bulk solution. So economically of scale, We have our building block solution to be more efficient because there are lots of product line and our volume was still In the middle size to small size of volume and we deserve and we'll continue to be aggressive to grow To see every segment, every vertical, we have a healthy economic of scale.

Speaker 7

Okay, great. Thank you. I will jump back in queue.

Operator

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

Speaker 8

Thanks for taking my question. Let me echo the congratulations on the very strong results. I guess I wanted to ask a gross margin question too. Obviously, it's moderated here in the current quarter and the forward quarter, as you guys position yourselves for further market share gains. I guess my question is, would sort of the midpoint of that 14% to 17% level that you set back in 2021, Is that sort of the right level to be thinking about as you guys stay aggressive and try to drive market share gains and maybe a Sort of a twist on the question.

Speaker 8

To the extent that supply catches up to demand and growth rates Slow, would you then start to focus more perhaps on higher margin business? Just any sort of thoughts where in that 14% to 17% range Margin may trend over the next year or 2 would be helpful.

Speaker 2

Yes, for sure, our most important principle Why would I base for shareholder for the company? So although we said 14% to 17% as of that range in 2021. But if any change, any further adjustment will be the best of our shareholder, we will do that change. And we are carefully evaluating the range kind of monthly.

Speaker 9

Okay, got it.

Speaker 8

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

Speaker 2

You are right. Indeed, the current 600, 700 watt per module, people can still take care very well with air condition. And that's why people are still comfortable with the traditional air cooler. But when the system grow to 1,000 or even more than 1,000 watt per module, Yes, I mean, that could even become even much more critical. So by that time, I believe most of the data centers We have a facility ready for that.

Speaker 2

So we are very optimistic and very patient to continue to improve our quality, especially the reliability and easy for maintenance. So when customer is ready, we can ramp up quickly to support them.

Speaker 8

Excellent. Thank you.

Speaker 2

Thank you for that question.

Operator

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

Speaker 9

Yes. Thanks for taking the questions and also great results. Just curious, when you talk about your customer concentration and the diversity of the business, when you talk about 26% and 11% of your revenue coming from 2 customers, are those the same customers? Like last quarter, I think you had a customer that was 25%. Or are you seeing these customers kind of bounce around?

Speaker 9

I guess The simple question is just, is that the same customer, that 26% versus 25%?

Speaker 3

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

Speaker 2

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

Speaker 9

Yes. And then as a quick follow-up, I'm just curious as we look at the AI kind of evolution from here, there's a lot more kind of product Diversity itself coming out, B100s, GH200, AMD's product lineup. As you think about the growth going Would you say that the growth is more ASP expansion driven as we think about these next generation platforms? Or Does diversity drive more of the growth being driven by unit volume growth? I'm just curious on how you would kind of characterize the growth driver from here going forward on those 2 inputs?

Speaker 2

I guess in next few years, Our growth will be quicker in terms of unit number. So the volume growth will be quicker Then ASP, because last 2 years, our ASP have been growing a lot, right? So next step, I guess, you need the number,

Operator

Our next question is from Anadha Bara with Loop Capital. Your line is now open.

Speaker 10

Yes. Good afternoon, guys. And Thanks for taking the question. Appreciate it. And congrats on the really solid execution.

Speaker 10

Yes, congrats on that. I guess, yes, 2 if I could, Charles, maybe a clarification. I did some math on the 15,000 racks per month and I came up with, I guess, 5,600,000,000 A quarter, call it $5,500,000 I guess plus or minus, but I count the $5,600,000,000 Is that kind of accurate? And I guess the question is, if it's sort of mid year, you're talking about getting to that point, Is that the kind of run rate opportunity that we can be thinking about quarterly and not like you've gotten, but like an opportunity when you get into sort of the When you get into sort of the back half of the calendar year, just want to make sure that we're interpreting that kind of accurately. And I have a quick follow-up.

Speaker 10

Thanks.

Speaker 2

Yes. Again, we say we like to make a green computing everywhere. That's why Whenever we can have customer base, we will. That's why we have been building a really large scale capacity for liquid cooling and other green computing solution. So yes, the capacity will be huge, but it's a capacity layer.

Speaker 2

When customer need, we are ready. And indeed, our facility also very flexible. Lots of CVD can support liquid cooling and air cool or combination cooling. So, yes, we have a huge capacity ready for growth, but not necessarily all for liquid cooling. They support air cool or combination hybrid cooling as well.

Speaker 10

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

Speaker 10

Thanks.

Speaker 2

Thank you. I mean, we spend a lot of effort to make our sales process and operation process, Service process be automatic. So those automation system for sales, for production, for Support really enlarge our capacity. And that's why we have a capacity to approach to support more customer now. So, and we need the economical scale, because economic scale are very important to our operation margin and overall EPS.

Speaker 2

So, yes, we are ready to grow much quicker EBIT.

Speaker 10

Yes, that's super helpful. Okay, guys. Thanks a lot. Congratulations.

Speaker 2

Thank you.

Operator

Our next question is from Jon Tanwanteng with CJS Securities. Your line is now open.

Speaker 7

Hi, thank you for the follow-up. I was just wondering if there is any changes to your OpEx growth formula. It's been on a trailing basis, Less than half of what revenue growth is. As you grow bigger and do you expect to run against any limits In supporting such a large customer base and potential customer base, or are you getting more economies of scale as you are larger with that?

Speaker 2

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

Speaker 7

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

Speaker 2

Yes. Our financing team have We've been very diligently working now more stores, especially try to minimize, dilute our stock, our equity. So we have a management program kind of well studied and ready there. So when we need more capital, We are ready. David, you may add something.

Speaker 3

Yes. So I'll just echo what Charles said. We're looking at a number of different things, John. And we but we are mindful of not having further dilution, as Charles said. So we're looking at a number of different opportunities.

Speaker 3

And the reason we have to is because we need more working capital for growth. And the reason that our cash flows were not did not were not as strong as last quarter was simply because we grew by so much. So if you when you grow by over $1,000,000,000 in a quarter, you've got to have additional working capital. So That's the plain and simple fact.

Speaker 2

Our inventory have been growing more than $1,000,000,000 Yes. And we are continuing to grow.

Speaker 7

Got it. Thank you very much.

Operator

Our last question will be from Nehal Chokshi with Northland. Your line is now open.

Speaker 6

Yes, great. Thanks for the follow-up question. And I actually have 2 follow-up questions. First, at the September quarter earnings call, you guys said the capacity was around $18,000,000,000 and that's up from $15,000,000,000 to June 2023 quarter. Was the driver of that actually increased capacity or increased ASPs?

Speaker 6

And then In relation to that, your full year guidance that implies a June 2 guidance of around 4,700,000,000 That implies that your annualized capacity is reaching $19,000,000,000 And so as your capacity is increasing, is this largely a, mix driven, Like for like ASP driven or has your capacity actually gone up prior to Malaysia coming online?

Speaker 2

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

Speaker 3

And one thing I'll add, Nehal, is that in December, we shipped over $1,700,000,000 And so that alone establishes $19,000,000,000 capability.

Speaker 6

Okay. And then my other question is that Typically going into the March quarter, revenue is seasonally down Q over Q guiding it up to be up Q over Q. Usually though when the revenue is down seasonally quarter to quarter, your cash conversion cycle goes on a Q basis. This March quarter, Howard, because you're projecting a Q3 revenue increase, does that change your expectations on cash conversion cycle seasonality dynamics?

Speaker 2

Yes, because of that demand, It is very strong. So we believe this March quarter will be a strong quarter as well. David, did you have anything to add to that?

Speaker 3

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

Speaker 6

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

Speaker 3

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

Speaker 6

Yes. Also

Speaker 2

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

Operator

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

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Earnings Conference Call
Lululemon Athletica Q2 2024
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