Super Micro Computer Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Incorporated, SMCI US Q4 2024 Earnings Call. With us today are Charles Liang, Founder, President and Chief Executive Officer David Wiegand, CFO and Michael Staiger, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session.

Speaker 1

Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the Q4, which ended June 30, 2024. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer and David Wiegand, Chief Financial Officer. At the end of today's prepared remarks, we'll have a Q and A session for sell side analysts. Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at ir.

Speaker 1

Supermicro.com. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current new product offerings and competitive industry and economic trends. Any forward looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC, and we refer you to those public filings, including our most recent Annual Report on Form 10 ks.

Speaker 1

During this call, all financial metrics and associated growth rates are non GAAP measures other than revenue and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Super Micro Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Super Micro. Our Q1 2025 quiet period begins at the close of business Friday, September 13, 2024.

Speaker 1

And with that, I will turn it over to Charles.

Speaker 2

Thank you, Michael. Today, I'm pleased to announce another record quarterly result of $5,310,000,000 143 percent year over year growth. For fiscal 2024, we have achieved $14,940,000,000 in revenue, a 110% year over year growth rate. To cover this in perspective, our Q4 revenue exceeded the full year revenue of fiscal 2022. Our robust growth is driven by our technology and product leadership in the AI infrastructure market, especially with generative AI training and invention.

Speaker 2

We have been scaling quickly to secure a larger share of AI ASP opportunities, deploying some of the largest AI superstars in the world. Leveraging our system building blocks, we build and optimize rack scale plug and play solutions with the latest TLC, nuclear cooling technology, helping our customers achieve the best TPD, Tantu Deeperim and TTO, Tantu Online and Loise TCO with their AI solutions. Here are some key quarterly highlights. First, Supermango is pleased to be included in the Nasdaq 100 and 20 Index last quarter. Post Q4 net revenue totaled $5,310,000,000 up 100 and 43% year on year with a strong record high backlog.

Speaker 2

We could ship more if not for DLC, liquid cooling component shortage, Basic Q4 non GAAP earnings of $6.25 per share were well above $3.51 last year, which was 78% year on year growth. Our Q4 operating margin is 7.8%, which is lower than what we expected due to the higher mix of hyperscale datacenter business and expedite cost of our DLC liquid cooling components in June September quarter. Some key new components shortage delayed about $800,000,000 of revenue, seeping to July, which lower our EPS for June and will be recognized in our September quarter. The availability of our Manasheya facility data this calendar year and our dominating position in DLC Deep Cooling Total Solution will be instrumental in increasing our profitability. Hubert Micro is powering the largest AI factories around the world today.

Speaker 2

We believe more and more data centers will be opting for our largest DLLC dewiscreen solution, which dramatically improved TCO relatively to a relative to a traditional air cooled data center and is best environmental taxing. We have proved that DLC solutions also offer higher performance and better uptime with advantages to support our upcoming new AI chips. At Camu Tech's Taipei, I shared that Brain Computing can be free with a big bonus. This means the cost of deploying liquid cooling, DLLC, is on top with traditional air cooled data center and significantly lowers the operational power cost. Since then, we have been delivering over 1,000 highly reliable D LSC racks to multiple customers.

Speaker 2

Our goal is to quickly make DLLC Liquid to be a mainstream solution for most data centers and AI factories that focus on increasing efficiency and performance, while reducing OpEx. We are targeting 25% to 30% of the new global data center deployments to use DLLC solutions in the next 12 months, with most of the deployments coming from Super Micro, we believe. We are happy to have any customers transforming and adapt their existing air cooled data center to DRC Deep Cooling in the coming years for 4 major reasons. 1st, it helps customers save energy costs up to 40%. 2nd, it boosts data center computing performance.

Speaker 2

And 3rd, it helps grow in customers' data center lead times, or to be more precisely, reduce their time to online because of less electrical power required. And 4, it reduces carbon footprint for our 1 and only mother earth. As an end to end IT Infrastructure Solutions company, our customers' experience is our number one priority. By leveraging our system building block and large scale plug and play solutions, we help our customers achieve the best time to market advantage with new and performance optimized technologies. Now, we are further expanding this solution to the entire data center, which represents the deployment of large scale AI infrastructure.

Speaker 2

Data centers worldwide are facing power shortage and cooling inefficiency challenges. Building these new AI ready data centers traditionally take a long time, averaging 3 years, for example. Our upcoming Supermicro 4.0, DCBBS, datacenter building block solution, where we reduce customers' new datacenter build time from about 3 years to 2 years. For smaller facilities, or older data center transformation, data center BPS can enable and optimize cost effective data centers in less than 1 year or even in just 6 months. This new offering will significantly improve data centers, TTO, 10209 and COS, with full integration of AI Compute, Server, Storage, Networking, DRAC, cabling, DLC de cooling, facility water tower, end to end management software, on-site deployment service and maintenance.

Speaker 2

We will start offering it later this calendar year. Creating a significant role in realizing our datacenter building block solution and providing additional economics of scale. Our new Malaysia campus will start production this November. With its geographic advantages, we expect it to quickly ramp up CP Morgan and improve our cost structure. In the U.

Speaker 2

S, we are adding new buildings and production POC provisioning capacity, mainly in our Silicon Valley headquarters as well, which will further boost our monthly DLLC liquid in rack capacity and value this fiscal year. Moreover, we are on track to expand to a few other global manufacturing locations, leveraging our strength in product design, build quality, supply chain and deployment, positioning Shubhamak as one of the largest IT infrastructure companies. In summary, we are entering fiscal 2025 with record high back orders, winning products, large volume DLLC deep cooling capacity, datacenter building block solutions and more new customers. While our long term investment impacts short term profitability, they position us well for future success by providing a sustainable competitive advantage and necessary economics of scale. This has given me confidence to forecast the September quarter revenue between $6,000,000,000 to $7,000,000,000 and fiscal 2025 revenue between $26,000,000,000 to $30,000,000,000 Again, we anticipate that the short term margin pressure will ease ease and return to normal range before the end of fiscal year 2025, especially when our DLLC, deep cooling and data center building block solution start to ship in high volume later this year.

Speaker 2

Lastly, I would like to announce 10 for 1 for all stock split of Super Micro's common stock to make ownership of Super Micro stock more accessible. We are targeting trading on a split adjusted basis. Mentioned at market opened on October 1, 2024. Before passing the call to David Wiegand, our CFO, I want to say thank you to our partners, customers, Shibu Micro employees, on an incredible year where we were able to bring AI at scale to the world and to our shareholders for your continued support. David?

Speaker 3

Thank you, Charles. We had robust growth in the fiscal year, and I'm pleased with the progress we made on our strategic initiatives. For fiscal year 'twenty four, we reported revenues of $14,900,000,000 representing 110% growth over fiscal year 'twenty three revenues of $7,100,000,000 Fiscal year 'twenty four non GAAP diluted EPS of $22.09 grew 87% over fiscal year 'twenty three non GAAP diluted EPS of 11 point $8.1 Between fiscal year 2021 and fiscal year 2024, we achieved significant operating leverage with revenues growing at a compound annual growth rate of 61% per year, while non GAAP operating expenses only grew at 19% per year. Between fiscal year 2021 fiscal year 2024, gross margins have met or exceeded the target range of 14% to 17%. Non GAAP operating margins were above the target range of 5% to 8% between fiscal year 2021 fiscal year 2024 and more than doubled from 4.4% in fiscal year 2021 to 10% in fiscal year 2024 due to strong revenue growth and operating leverage.

Speaker 3

Q4 revenues were $5,310,000,000 up 143 percent year over year and up 38% quarter over quarter and above the midpoint of guidance of 5.1

Speaker 4

to $5,500,000,000

Speaker 3

Growth was driven by strong demand for next generation air cooled and direct liquid cooled rack scale AI GPU platforms, representing over 70% of revenues across enterprise and cloud service provider markets, where demand remains strong. We exited the year with an acceleration in innovative DLC products, a large design win pipeline and a strong backlog, positioning us for continued growth in fiscal year 2025. We expect gross and operating margins to gradually increase in the year, driven by product and customer mix, manufacturing efficiencies for new DLC AI GPU clusters and new platform introductions. As Charles discussed, shipments may continue to be constrained in the short term by supply chain bottlenecks for key new components for our advanced platforms. However, long term gross margins will benefit from lower manufacturing costs as we scale up production in Malaysia and Taiwan in addition to expansion in the Americas and Europe.

Speaker 3

During Q4, we recorded $1,830,000,000 in the enterprise channel vertical, representing 34% of revenues versus 49% in the last quarter, up 87% year over year and down 3% quarter over quarter. The OEM appliance and large data center segment revenues were $3,410,000,000 representing 64% of Q4 revenues versus 50% in the last quarter, up 192% year over year and up 76% quarter over quarter. Emerging 5 gs telco edge IoT revenues were $75,000,000 or 2% of Q4 revenues. For fiscal year 'twenty four, enterprise channel revenues grew 79% to represent 41% of total revenues. The OEM appliance and large data center segment grew 149% and represented 58% of total revenues.

Speaker 3

The emerging 5 gs Telco Edge IoT segment represented 1% of total revenues. 1 CSP large data center customer represented approximately 20% of revenues for fiscal year 2024. Server and storage systems comprised 95% of Q4 revenue and subsystems and accessories represented 5%. ASPs increased on a year over year and quarter over quarter basis, driven by the value and complexity of our rack scale total IT solutions. At geography, U.

Speaker 3

S. Represented 61% of Q4 revenues Asia 24%, Europe 10% and Rest of World 5%. On a year over year basis, U. S. Revenues increased 94%.

Speaker 3

Asia increased 4 37%, Europe increased 128%, and the rest of world increased 3 86%. On a quarter over quarter basis, U. S. Revenues increased 20%, Asia increased 66%, Europe increased 74%, and rest of the world increased 187%. The Q4 non GAAP gross margin was 11.3% versus 15.6% in Q3 due to product and customer mix, focus on winning strategic new designs with competitive pricing and higher initial costs in ramping production of new VLC AI GPU clusters.

Speaker 3

For fiscal year 'twenty four, the non GAAP gross margin was 14.2% versus 18.1% for fiscal year 'twenty three. We have a path to improve gross margins to the target range of 14% to 17% as we introduce innovative platforms based on multiple new technologies from our strategic partners and improved manufacturing efficiencies on our DLC solutions. Q4 operating expenses on a GAAP basis increased by 15% quarter over quarter and 75% year over year to $253,000,000 driven by higher compensation expenses and headcount. On a non GAAP basis, operating expenses increased 11% quarter over quarter and 39% year over year to $185,000,000 Q4 non GAAP operating margin was 7.1% versus 11.3% in Q3 due to the lower gross margins. Other income and expense for Q4 was $11,000,000 consisting of $3,000,000 in interest expense and $14,000,000 from interest income on higher cash balances, offset by a loss from foreign exchange and other investments.

Speaker 3

Interest expenses decreased sequentially as we paid down short term bank credit facilities. The tax provision for Q4 was $1,000,000 on a GAAP basis and $21,000,000 on a non GAAP basis. The GAAP tax rate for Q4 was 0.3% and the non GAAP tax rate was 5%. The GAAP tax rate was 4.9% for fiscal year 2024 versus 14.7% in fiscal year 2020 3 and the non GAAP tax rate was 10.4% for fiscal year 'twenty four versus 15.9% in fiscal year 'twenty three. Q4 GAAP diluted earnings per share of $5.51 was below the guidance of $7.20 to $8.05 and non GAAP diluted EPS of 6.25 percent was below the guidance of $7.62 to $8.42 due to lower gross margins and higher operating expenses in the quarter.

Speaker 3

The GAAP fully diluted share count increased quarter over quarter from 61,400,000 to 64,200,000 and the non GAAP share count increased sequentially from 62,000,000 to 64,800,000 shares reflecting the effects of 2 recent stock offerings and the convertible bond offering. Q4 cash flow used in operations was $635,000,000 compared to $1,520,000,000 in the previous quarter as inventory and accounts receivable grew due to higher levels of business and the timing of shipments. For fiscal year 'twenty four, cash used in operations was 2.5 $1,000,000,000 due to strong revenue growth of 110% and working capital needs to support large customer design wins. Q4 closing inventory was $4,400,000,000 in anticipation of future growth. CapEx for Q4 was $27,000,000 resulting in negative free cash flow of $662,000,000 for the quarter.

Speaker 3

CapEx for fiscal year 'twenty four was $137,000,000 up $37,000,000 from in fiscal year 'twenty three as we invested in new property, plant and equipment globally, including our Greenfield Malaysia plant. The Q4 closing balance sheet position was $1,700,000,000 while bank and convertible note debt was $2,200,000,000 resulting in a net cash position of negative $504,000,000 versus a net cash position of $252,000,000 last quarter. Turning to the balance sheet and working capital metrics compared to last quarter. The Q4 cash conversion cycle was 94 days versus 96 days in Q3. Days of inventory decreased by 10 days to 82 days compared to the prior quarter of 92 days.

Speaker 3

Days sales outstanding was unchanged at 37 days, while days payables outstanding decreased by 8 days to 25 days. Now turning to the outlook for Q1 fiscal year 2025. We expect strong growth as we ramp new air cooled and DLC AI GPU design wins with new and existing customers. For the Q1 of fiscal 2025, we expect net sales in the range of $6,000,000,000 to $7,000,000,000 GAAP diluted net income per share of $5.97 to $7.66 and non GAAP diluted net income per share of $6.69 to $8.27 We expect gross margins to improve sequentially due to product and customer mix and improving manufacturing efficiency. GAAP operating expenses are expected to be approximately $282,000,000 and include $84,000,000 in stock based compensation expenses that are not included in non GAAP operating expenses.

Speaker 3

The outlook for Q1 of fiscal year 2025 fully diluted GAAP EPS includes approximately 48,000,000 dollars in expected stock based compensation expenses, net of tax effects of $30,000,000 $35,000,000 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 $20,000,000 The company's projections for Q1 fiscal year 2025 GAAP and non GAAP diluted net income per common share assume a GAAP tax rate of 9.9% and a non GAAP tax rate of 14.6 percent and a fully diluted share count of 65,000,000 for GAAP and 66,000,000 shares for non GAAP. We expect CapEx for Q1 to be in the range of $45,000,000 to $55,000,000 For fiscal year 2025, we are introducing guidance for revenues from $26,000,000,000 to $30,000,000,000 Michael, we're now ready for Q and A.

Speaker 2

Awesome. Terry?

Operator

Our first question today is from the line of Michael Ng of Goldman Sachs. Please go ahead. Your line is now open.

Speaker 5

Hey, good afternoon. Thank you very much for the question. I guess I have 2. Encouraged to see the revenue guidance for $26,000,000,000 to $30,000,000,000 for fiscal 2025. I was wondering if you could just provide a little bit of color around the assumptions underpinning that revenue guidance and any visibility that you have in terms of backlog and some of the contingencies you might be assuming in terms of supply availability?

Speaker 5

And then secondly, I was just wondering if you could provide a little bit more color around the gross and operating margin improvement throughout the year? Should we think about the long term gross margin targets as applicable for the full year as well or exiting the year? Thank you.

Speaker 2

Okay. Thank you. I mean, as to what we share, I mean, we continue to gain design win and we saw also new product available including DRC, deep cooling and data center building block solution. We see a lot of customer engagement and also more new customer like to engage with us. So with our capacity continue to grow, so $26,000,000,000 to $30,000,000,000 That's our target for next 12 months.

Speaker 2

And as to gross margin, as what we just mentioned, our DRC, Deepcooling now have been very mature. So we are able to take advantage from that and also our data center building block solution that provide a much better value, improve customers' data center time to online and also our EG customers job to build their data center. So all of those will increase our profitability gradually.

Speaker 5

Thank you, Charles.

Speaker 2

Thank you.

Operator

Our next question today is from the line of Samik Chatterjee of JPMorgan. Please go ahead. Your line is now open.

Speaker 6

Yes. Hi. Thanks for taking my questions. I have a couple as well. Performance in the quarter.

Speaker 6

I know you mentioned you had a hyperscale customer, which impacted product customer mix and margin impact there. How should we think about sustainability or sort of repeat orders from that customer? It sounds like you're saying that's part of the improvement and you probably don't see as much repeat. But just wanted to confirm if that's how we should be thinking about the hyperscale customer you had, which is that it doesn't really repeat through fiscal 2025? And I have a follow-up.

Speaker 2

Yes. We have been very consistent. I mean, before we are Silicon Valley based, operation mostly in Silicon Valley. So we focus on enterprise, high quality, high performance customer only, not before. But when we start to take production, operation advantage from Taiwan, we start to grow a larger scale data center customer.

Speaker 2

And now, we have a huge capacity in Malaysia. We'll be ready by later this year. So with economic large scale advantage, we are waiting for large customer. So we will continue to grow with large customer. At the same time, we also continue to enhance our enterprise customer base.

Speaker 2

So recently, we also see the growth and strong demand from enterprise. With our software total solution, I mean, datacenter building block solution, we start to gain more attraction for the data center I mean, enterprise customer as well. So, we believe long term economic scale, enterprise customer base and overall Taiwan and Malaysia advantage cost advantage that we have a way to grow gross margin and net profit.

Speaker 7

Got it.

Speaker 6

Got it. And for my follow-up, Charles, there have been reports more recently about the delay of the GB200 from NVIDIA. Just wondering if you can share your thoughts of how that would impact the conversion of the robust backlog or pipeline that you're looking at to revenue through the year? And is that accounted for when you talk about liquid cooling now being a materially higher portion than what you talked about at Computex? Are you taking some of those delays into account?

Speaker 6

Thank you.

Speaker 2

Yes. I mean, yes, we heard NVIDIA may have some delay, right? And we treat that as a normal possibility. When they introduce new technology, new product, they always have a chance to go in a little bit or push out a little bit. In this case, push out a little bit.

Speaker 2

But to us, I believe we are no problem to provide the customer with new solution like H200 cooling. We have lots of customers like that. So although we hope better deploying the schedule, that's good for a technology company. But this push out overall impact to us, there should be not too much.

Speaker 8

Okay.

Speaker 6

Thank you. Thanks for taking my question.

Operator

Yes. Our next question today is from the line of Ruplu Vasujaya of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Speaker 9

Hi, thanks for taking my questions. I have 2 of them. The first one relates to the gross margin performance in the quarter. David, can you specify of the 4 30 bps sequential decline, how much was the result of the customer mix, which is the higher hyperscale customer mix versus the impact of ramping liquid cooling solutions? And how much was that impact to gross margins?

Speaker 9

And in terms of I think Charles you said that you lost about $800,000,000 of revenue in quarter because of non availability of components. Is that all liquid cooling related? Or was that related to other things like GPUs as well? Thank you.

Speaker 2

Pretty much, the cooling key components related. But now it's much ready now. I mean, when we move to July, August, we have much deep cooling key components available now.

Speaker 1

The group wasn't a loss, it was pushed out into the next quarter.

Speaker 3

Yes. And there was a Okay. David Group was Yes. So there was we really were surprised by the amount of demand that we had in this market. And so we our manufacturing efficiency improves has been improving every day.

Speaker 3

And so we expect that to continue and that's going to help our gross margins going forward as we deploy liquid cooled racks at scale.

Speaker 9

And is that deployment expected to be linear for these liquid cooled racks throughout the year? Or is it more back end loaded? Thanks. Thanks for taking my questions.

Speaker 2

Basically, we support handful of customers for liquid cooling. And most of them, once they try our liquid cooling, they will continue to deploy higher percentage with deep cooling because the cost, the hardware acquisition cost is about the same, but they were safe, lots of energy cost. So I believe this growth will be consistently growing.

Operator

Thank you. Our next question today is from the line of Ananda Baruah of Loop Capital. Please go ahead. Your line is open.

Speaker 10

Yes. Good afternoon, guys. Thanks for taking the question. Charles, you said a lot of good stuff on this call. So I'll try to just ask about 1 or 2 things here.

Speaker 10

I guess to start, could you frame for us how the company is thinking about its liquid cooling capability relative to others who are providing with the cooling service as well. That's been a big topic of conversation. It sounds like you guys are really high on your capability and it seems to be showing up at least in the guidance. But I think additional context around how you guys are competitively positioned and maybe some of the technical reasons why would be super useful for those. I think I just have a quick follow-up.

Speaker 2

Yes, thank you. I mean, as you know, Nickelodeon has been in the market for 30 years and much share compared with overall data center size always small, less than 1% or close to 1%, I would rather say. But just June July, 2 months alone, we shipped more than R1,000 to the market. And if you calculate R1,000 AI RAG, it's about more than 15% for a global data center new deployment. So we are very happy.

Speaker 2

We have the industry push from air cool to deep cool and to have a customer save energy cost and reduce carbon footprint. At the same time, because of the deep cooling, DLLC deep cooling, data centers require 30% to 40% less power. That's why it makes customers' data center availability quicker because customers don't have to wait for higher power budget from a powering company. So overall, we see more and more customers like our liquid cooling

Speaker 10

solution. And Charles, did I hear you accurately that you guys think you did 50% liquid cooling share in the June quarter?

Speaker 2

I believe for June July in those 2 months, we may ship at least 70% to 80% or deoxy cooling compared with the older deoxy cooling in the world. So for liquid cooling, we have at least 70% to 80% max year.

Speaker 10

That's useful. That's useful. Thank you. And then just real quick, my follow-up is, you've made remarks earlier this year in the recent past about how you envision expanding your rack capacity sort of over the sort of into the future. I was just wondering if you could give us an update on how to think about how you're thinking about rack capacity expansion for both liquid cooled and air cooled?

Speaker 10

And that's it for me. Thanks.

Speaker 2

Yes. It's a very good question. I mean last month we have about R1,000 rack per month deep cooling capacity. And today we already grow another 50%. So now we have a R1500 per month capacity.

Speaker 2

By this year end, we will grow that to 3,000 rack per month. That's what liquid cooling allowed. So we really believe liquid cooling is a much better choice for the market. And we provide the kind of consultation to customer and most of the customer when discuss with our engineering team, they love liquid cooling. And again, we are growing customer base for liquid cooling very strongly.

Speaker 2

And we're really happy for that because minimize the power consumption have been common value to the world and especially safe operation cost.

Speaker 10

And that's fiscal year? Fiscal year, when you say end of the year, end of fiscal year?

Speaker 2

For the next 12 months, I believe, deep cooling will be big portion of our business.

Operator

Our next question today is from the line of Aaron Seyrakers of Wells Fargo. Please go ahead. Your line is open.

Speaker 4

Yes. Thanks for taking the question. I've got 2 as well. I guess I want to go back to the earlier So, Charles, I want to be clear. So, So, Charles, I want to be clear.

Speaker 4

So has your guidance contemplated as we think about the December quarter? Do you believe that you'll be shipping the Blackwell platform solutions for revenue in the December quarter? Or should we think about the full year guide as a bit more weighted to the back half of the fiscal year, given some of these concerns around the timing of Blackwell availability and NBL36 and 72 platforms, etcetera. I'm just curious of how you want us to think or The Street to think about the cadence of that full year guidance shaping up on a quarterly basis? Appreciate that you're not going to

Speaker 1

give quarter by quarter guidance.

Speaker 2

Yes, thank you. I mean, indeed, we are relatively very conservative. I understand Black Whale may postpone how much we don't exactly know because the new technology always what can be pushed out, right? So for Q3, for sure, we did not expect any BlackWear volume. For Q4, I mean, December quarter, I guess, will be very small, engineering sample, small volume.

Speaker 2

So that really volume, I believe, had to be March quarter next year. And that's why we only $26,000,000,000 to $30,000,000,000

Speaker 4

Yes, that's very helpful. And then as a quick follow-up, I want to go back to kind of the gross margin discussion too. We talked about the impact of direct the DLC platforms. You talked about product mix. One of the other comments, David, you had made was that winning strategic new customers was a factor in that 430 basis point gross margin degradation.

Speaker 4

Can you help us appreciate what exactly the impact of that has been? How that might have changed this last quarter? And then I'll flip my final, final one in. Any disclosure on purchase obligations coming out of this last quarter? Thank you.

Speaker 3

Yes, thanks. I'll answer those in reverse order. Yes, we don't have any announcements in terms of purchase obligations and so we'll point you to the 10 ks for that. But with respect to your first question, I would say we prepared the market for a downturn in margins or a softening of margins in our guidance last quarter. But we even we were surprised by the acceleration that we saw in the liquid cooled rack market.

Speaker 3

And so we had to ramp up our supply chain. We paid a lot of expedite costs and higher supply chain costs. So I think as the supply chain improves, we expect those efficiencies to now come back out, but that impacted us more than we had expected. Especially

Speaker 2

for June quarter?

Speaker 3

Yes, for the June quarter.

Speaker 11

Was that

Speaker 4

the majority of the 4.30? Was that the majority

Speaker 3

of the 4.30 basis points decline? So half was targeting specific accounts like we announced last quarter. And the other half was really the higher supply costs that we encountered.

Speaker 4

Yes, very helpful. Thank you, guys.

Operator

Our next question today is from the line of George Wang of Barclays. Please go ahead. Your line is now open.

Speaker 12

Hey, guys. Thanks for taking my question. I have 2 parts. Firstly, can you give more color just in terms of share gains, especially within the hyperscale arena? Traditionally, Super Hyper has been more Tier 2, Tier 3 enterprise.

Speaker 12

And you guys talk about higher mix on hyperscale. Just curious, does that mean you guys are winning new penetration into the hyperscale space?

Speaker 2

Yes. Again, like what I just mentioned, with our Taiwan capacity is getting bigger and Malaysia capacity will be ready. So we are fully ready for larger scale data center customer. But we will be selective. So that's why we foresee only $26,000,000,000 to $30,000,000,000 If we try to be more aggressive in a larger scale, our growth can be even faster than that.

Speaker 2

But we try to grow in both ways, enterprise and a larger scale. There is kind of try to balance, so to maintain our healthy profitability.

Speaker 12

Okay, great. Just second question, if I can squeeze in. Just as we enter the Blackwell era, with liquid cooling kind of larger deployments, higher ASP, but also come with some potential working capital need. Just in terms of the capital rates, is that fair to say you guys are sufficient or there could be some potential to come to the market? Just maybe you can talk about the puts and takes for the next 12 months?

Speaker 2

Yes. Digiculing, I mean, for sure, is necessary and is very helpful for BlackWear solution. Although BlackWear solution pushed out a little bit, but indeed, we enabled the cooling for H100 and H200 as well. And lots of customer interest in our H100 and H200 liquid cooling now indeed. So liquid cooling for our competition, we like to support the whole data center, not just Blackwire.

Speaker 12

Okay. Can you address on the working capital, if you can give any color on that?

Speaker 3

Yes. So we announced a $500,000,000 credit line with a group led by the Bank of America. And so we expect we are really working on our balance sheet and leveraging our balance sheet. And we expect to some announcements to be coming in terms of additional loan possibilities in the future.

Speaker 12

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

Operator

Our next question today is from the line of Jon Tanwanteng of CJS Securities. Please go ahead. Your line is open.

Speaker 13

Hey, good afternoon. Thank you for taking my question. I was wondering if you could just talk given your time to market and volume capabilities in liquid cooling, the energy and compute advantages, Can you walk through what your pricing strategy is and why not pass those costs on, especially relative to the value that you're providing? Is it a stronger competitive environment close to behind you or are you effectively trying to get ahead of them and get that share first?

Speaker 2

Yes. I mean, indeed, Dick Recruiting, from our point of view, is really good value to the whole market and our whole planet because the best energy consumption, right? So we enabled liquid cooling primarily for backware, right? Because backware higher power than for sure, lots of case need deep cooling. But we enabled that for H123, H220 and regular CPU as well.

Speaker 2

Because overall, new cooling once mature, once economical scale is good enough, it's good for all different kind of computing. And that's exactly now we are deploying, we are promoting. Lots of our customers continue to interest in our data including even enough for black whale.

Speaker 13

Got it. Thank you. And then you mentioned getting back to the gross margin target range by the fiscal year end. Can you help us narrow down a little bit more where in that target range you expect to be? Is it the low end?

Speaker 13

Is it more towards the middle? Kind of help us understand how you're getting there.

Speaker 2

Okay. For June, it's really a unique quarter because we're pulling in lots of liquid cooling and we paid out of exploration for our coast. So that megahertz tune gross margin much worse. But now indeed our deep cooling technology have been get very mature and we have a high volume now. So that's lower our deep cooling cost now.

Speaker 2

And however, we try to promote deep cooling as mainstream product solution. So we try not to add value too much to customer, but instead we try to gain much share and make liquid cooling everywhere.

Speaker 13

Okay. Thank you. And any color just on where in the margin range you expect to end up?

Speaker 3

Well, so we I think if you look at the guidance that we gave for Q1, we expect to be above 12% in the Q1. And we're doing we'll be working very hard to move back into the range as we mentioned as soon as as quickly as we can.

Speaker 2

Especially with our Commision data center billing block solution with more software on-site deployment, maintenance and kind of end to end management service. So our profit margin should grow from building block solution for data center very

Speaker 13

soon. Great. Thank you, guys.

Operator

Our next question is from the line of Mehdi Hosseini of SIG. Please go ahead. Your line is open.

Speaker 7

Yes. Thanks for taking my question. I just have 2 housekeeping items. David, what kind of other income did you have in the June quarter? You did say that you had an interest income of 12 $1,000,000 that you realized in June quarter?

Speaker 3

That was a net figure, Mehdi. So we actually had 20,000,000 dollars of interest income, but that was offset by some adjustments to some investment adjustments of which brought down lower.

Speaker 7

Interest income? So the $20,000,000 is that interest?

Speaker 3

$20,000,000 was interest income, yes, from higher cash balances. That was offset by some investment.

Speaker 7

The same quarter. Correct. Okay. All right. Okay.

Speaker 7

And then a question I have for Charles. Obviously, you have done a good job of doubling revenue in fiscal year 2024, but you also had a negative free cash flow of 2.6%. And if I were to look at the high end of your revenue guide for fiscal year 2025, you're on track to double revenues again. Does that mean that you're going to need to burn another $2,500,000,000 to $2,600,000,000 of free cash flow to hit those revenue targets?

Speaker 2

Not necessary. I mean, if we try to be very aggressively growing market share, maybe. For example, we forecast on 30 something $1,000,000,000 right? So in that case, we may need more. But if we try to focus on those 30, then not necessary.

Speaker 3

And Mehdi, one thing I would add to that is, we believe that we have an IG profile. And as such, like I mentioned earlier, we're starting to leverage our balance sheet more with targeting toward unsecured debt. And so that will help us on an inter quarter basis.

Speaker 7

Got you. Thank you. Just what should I assume for fiscal year 2020 5 CapEx?

Speaker 3

We don't have a we're not giving a guide at this time.

Speaker 7

Okay. But would it be down on a year over year basis since most of the expansion in Malaysia and U. S. Are behind us?

Speaker 3

Well, we have other projects going on, expansion here in the U. S, but we'll nothing to announce today.

Speaker 7

Got you. All right. Thank you, Dave.

Operator

Our next question today is from the line of Nehal Chokshi of Northern Capital Markets. Please go ahead. Your line is now open.

Speaker 8

Yes. Thank you. I want to talk about DLP and some of the chatter that's been out there from some competitors in that. It sounds like failure rates for DLC, broadly speaking, not necessarily for Super Micro, is high relative to Air Cooled. Can you comment on what is Super Micro's DLC failure rates relative to air cooled and then also relative to other DLC solutions?

Speaker 8

And I guess maybe we can do it on a per node basis annualized failure rates or whatever basis you want to utilize?

Speaker 2

Yes. We spent a lot of effort in last, I would like to say, 2 years to prepare our optimized DRC solution, including lots of new design, redesign, refining the components of the system. So finally, I mean, about May this year, right, we have our TRC solution for U Ready. And we have more than a handful high profile customer who really like our DRC solution. That's why we put in the solution to them and that's why we paid out our acceleration charge, right?

Speaker 2

But now, the good thing is our whole TLC solution has been very mature and ready for really high volume production. So now for any customer one TLC, we are able to support them quickly and with much reasonable cost now. So looking forward, I mean, DRC, I believe, will be a really popular solution for the world because it's more efficient, especially energy saving. So we are very happy that we established DRG solution much ahead of anyone else. Again, like June July, I believe we have at least 70% or 80%, maybe even higher mark share in the world for DRC.

Speaker 2

And AirCore, again, we have been have a very optimized AirCore solution. So we continue to promote AirCore solution for sure.

Speaker 8

And do you have any thoughts on the actual like failure rates relative to Air Cooled and then relative to other suppliers' TLC solutions?

Speaker 2

Yes. Digger cooling, as you know, because they're very high efficient in cooling, right? So they allow CPU, GPU, OLED components running at a lower temperature. And there in those cases, indeed, are able to optimize customers' data center performance by percentage, right, couple percentage to even high single digit percentage. So a lot of customers really like the DLC at this moment.

Speaker 8

I see. So are you saying that you actually can achieve lower failure rates with DLC because you can run the GPUs at lower temperatures?

Speaker 2

CPU, GPU and other components at a lower temperature. That will show up. The kind of the whole data center quality uptime, availability time.

Speaker 8

Okay. And then my follow-up question is that, I think June 21, you did an 8 ks after market close, leasing significant data center space from prime data center and then you're leasing it back to Lambda Labs. It seems like a rather odd arrangement. Can you guys talk about the purpose of doing this?

Speaker 3

So we consider ourselves experts in data center data center solutions. And so this is really just one more facet of being a total provider.

Speaker 6

Okay. Thank you.

Operator

Thank you. And our next question is from the line of Thomas Blakey of KeyCorp. Please go ahead. Your line is open.

Speaker 11

Hi, guys. Thanks for taking my question. Got a few here. David, could you comment on the mix shift in the mix rather of AI Rack Scale revenue here in the quarter? Was it did it increase quarter on quarter in the June quarter?

Speaker 3

Absolutely. I mean, our revenues went up 1,500,000,000 dollars and that was primarily driven by liquid cooled racks.

Speaker 11

Okay. Excellent. And an update maybe on the capacity utilization, did that increase as well or decrease? And relatedly to that, you commented last quarter that there would be a number, I think about it about 1,000 of racks per month going out at a 64 GPU configuration. Could you give an update in terms of did you ship those to the 3 customers, one was new in the June quarter?

Speaker 11

And again, an update on the capacity utilization related to that question.

Speaker 2

Yes. Customer like our high density computing solution, especially per rack, that's why you say 60 watt GPU or more GPU, right? So we are very efficiently provide a customer for whatever configuration they like. And very soon we will allow something even better for sure.

Speaker 11

So to be clear, is that a yes that you shipped 3,000 racks during the quarter at that configuration to those 3 customers?

Speaker 2

We are building that capacity for that because how many customers will move to DLLC, especially when black wire already. So we are very optimistic for that, especially after blackware in high volume production. And we have many blackware fully optimized system and drive scale design.

Speaker 3

Yes. But Thomas, the 1,000 per month is was the capacity. We're not saying that we shipped 1,000 per month. But one thing I can tell you

Speaker 7

is that That's not clear.

Speaker 2

The efficient yes. Yes.

Speaker 12

Okay.

Operator

Thank you. And we have run out of time for any further questions. So this will conclude the Super Micro Computer Incorporated Q4 20 24 earnings call.

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Super Micro Computer Q4 2024
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