Super Micro Computer, Inc. (SMCI) on Q2 2022 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. Thank you. It’s now my pleasure to turn the call over to Nicole Noutsios, Investor Relations. Please go ahead. Nicole Noutsios: Good afternoon. And thank you for attending Super Micro’s call to discuss financial results for the second quarter, which ended December 31, 2021. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; Patrick Wang, President, East Coast and SVP, Strategy and Corporate Development; and David Weigand, Chief Financial Officer. By now, you should have received a copy of the news release from the company that was distributed at the close of regular trading and is available on the company’s website. As a reminder, during today’s call, the company will refer to a presentation that is available to participants on the IR section of the company’s website under Events & Presentations tab. We have also published management’s scripted commentary on our website. 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 the third quarter of fiscal year 2022 and the full fiscal year 2022, and the potential impact of COVID-19 on the company’s business and results of operations. There are a number of risk factors that could cause Super Micro’s future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2021 and our other SEC filings. All of these documents are available on the IR page of Super Micro’s website. We assume no obligation to update any forward-looking statements. Most of today’s presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation to our 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&A session for sell-side analysts to ask questions. I’ll now call the Charles -- call over to Charles. Charles Liang: Thank you, Nicole, and good afternoon, everyone. Today, I am pleased to announce our quarterly revenue of $1.17 billion for fiscal Q2 2022, which was 41% year-over-year growth, and our sequential growth was 14%. We have seen strong growth in all our key verticals and geographies despite challenges from global component shortage and COVID impact. More importantly, our Total IT Solutions strategy has been empowering us to continuously gain market share, all thanks to our dedicated employees, powerful server building block solutions, and finally, our fast growing software products. With the bigger TAM and potential from Total IT Solutions, I believe our growth trend will continue for many years to come and getting stronger quarter-after-quarter. Now, let’s look at some key highlights from the quarter. First, again, our fiscal second quarter net revenue totaled $1.17 billion, up 41% year-on-year and up 14% quarter-on-quarter, at the higher end of our guidance range of $1.1 billion to $1.2 billion. It’s Super Micro’s fourth consecutive quarter of fast revenue progression as we continue our growth trajectory at multiple times the industry’s growth rate. Our fiscal second quarter non-GAAP earnings per share was $0.88, compared to $0.63 in the same quarter last year, which was 40% growth and at the higher end of our guidance range of $0.70 to $0.90. All our major geographies contributed significantly to our year-over-year growth, especially in the APAC region which grew 76% year-over-year. The Taiwan expansion boosts our APAC and EMEA growth momentum by providing additional capacity and lowering operational cost. We continued to expand the B2B Auto-configurator program to service significantly more customers during the quarter. Our innovative center -- command-center based on-line business system has been improving our sales, FAE, PM team’s efficiency, as well as our key customer’s satisfaction. Recent market conditions have presented us with better opportunities to accelerate our business transition from a hardware company to a Total IT Solutions company. The transition has enabled Super Micro to offer customers higher value and product availability with optimal hardware, software, services, switches and more. Our results have shown that our outperform -- we outperform our previous $10 billion annual revenue target timeline we shared in the few quarter ago. More encouragingly, we are observing a diversified growth across our target verticals, which are large enterprise, AI, machine learning, Cloud, 5G/telco and IoT. Our design wins and engagements with Fortune-listed customers continue to grow quickly with our Total IT Solutions. Our push towards Total IT Solutions is benefiting Super Micro and our customers in multiple ways. Most notably, our customers will receive higher-quality, plug-and-play ready products that are fully optimized, integrated and validated in-house. This effort is also helping Super Micro and our customers mitigate the impact of the global supply chain disruptions by accurately forecasting, building inventories in scale and prioritizing with our strategic partners. As a result, our Total IT Solutions dramatically improve our customer’s time-to-market and increase Super Micro’s value. Our Total IT Solutions are built upon a robust knowledge of system architecture and building blocks that can be optimized for most market verticals. With the rise of Omniverse and Metaverse, we have recently introduced several new architectures to enhance our GPU product offerings. Our new Universal GPU architecture allows customers to choose the best CPUs, GPUs, switches and I/O configurations to truly optimize their applications and workloads, leveraging either Intel Xeon Scalable processors or AMD EPYC processors. The Universal GPU system enables customer to standardize configurations in their clusters for the desired workloads on a single platform. This unique versatile system supports various GPUs, including NVIDIA A100 GPUs, the newly announced AMD MI200 series accelerators, many FPGA products from different companies and others. I am glad to announce that we already have many major customers and industry leaders committing to this new platform, and the only limitation is the supply chain challenge. Partnering closely with leading technology providers in the emerging Metaverse and Omniverse ecosystems, Super Micro has doubled our GPU product lines to support these 3D and immersive workloads. Our 2U 2-node GPU system provides an optimal mix of CPU-to-GPU ratio with resource-saving features. Our high performance and highly configurable Hyper and Hyper-E servers support multiple GPUs in a single system and are ideal for use cases such as distributed AI inferencing applications, content delivery, telco micro datacenters, 5G core and many other mission critical enterprise workloads. Along with our NVIDIA A100 Delta and Redstone platforms, Super Micro’s comprehensive AI system building blocks support everything from inference at the edge to high-performance computing data center for the Metaverse or Omniverse kind of application and everything in between. Last quarter we have redefined our growth drivers to speed up our growth strategies, which include; Subsystem and Components, Complete Systems, Total IT Solutions and 5S’s. Our building blocks and complete systems business have been steadily growing over the decades with the help of our partners, and they still serve as the backbone of our revenue growth. With other large enterprise customers, top technology-leading companies and appliance partners engagements, I would like to emphasize again that Total IT Solutions business is our new major growth driver now. Going forward, our investments in software products, service and networking will be the keys to improve our margins and profitability in the coming quarters and years. In summary, Super Micro is rapidly growing and transforming into a Total IT Solutions company from a server hardware company. We are accelerating our design wins and market share gains at key large global customers including enterprise, AI, machine learning, 5G/telco and Edge and IoT. We are improving our profitability and replicating our market share success in the U.S. to APAC and EMEA with the completion of our APAC expansions and rapid production ramp in Taiwan. Our new Command Center Based Auto-configurator and B2B Automation platforms are improving our operations effectiveness and customer satisfaction while accelerating our market-share gains. In closing, our 41% year-over-year revenue growth is a solid proof that Super Micro’s business is taking off quickly now. I am confident that our market presence, TAM and profitability will continue to increase strongly and we invest more -- as we invest more resources instead we are -- as a Total IT Solutions company. My team and I have been diligently executing our growth strategies and accelerating the timeline to pull in our $10 billion revenue goal. I will now pass the call to David Weigand, our Financial -- Chief Financial Officer, to provide additional details on the quarter. Thank you. David Weigand: Thank you, Charles. I am pleased to report our third consecutive quarter of revenues exceeding $1 billion. We are seeing continued strength across all geographies and strong demand for our products and services, resulting in fiscal second quarter revenue of $1.17 billion, a 41% year-on-year increase and up 14% quarter-on-quarter. Our Q2 revenues were at the higher end of our guidance range of $1.1 billion to $1.2 billion. Revenues for the trailing four quarters in Q3 of fiscal year 2021 through Q of fiscal year 2022 totaled $4.17 billion. Super Micro’s Q2 FY 2022 recorded revenue growth across all three of our market verticals, achieving $756 million in the Organic Enterprise and Channel and AI/ML vertical, $274 million in OEM appliance and large data center vertical and $142 million in the 5G/telco and Edge/IoT vertical. The 5G/telco and Edge/IOT vertical more than doubled sequentially as new designs went into production. Systems comprised 84% of total revenue and subsystems and accessories represented 16% of Q2 revenues. The volume of systems and nodes shipped, as well as System node ASPs increased both year-over-year and quarter-on-quarter. On a year-on-year basis, Asia, including Japan, increased 76% as we saw continued growth with both new and existing and customers, Europe increased 39%, U.S. increased 38% and Rest of World decreased 32%. On a sequential basis, Asia including Japan increased 8%, U.S. sales increased 14%, Europe increased 20%, and Rest of World increased 19%. The Q2 gross margin was 14%, which was up 60 basis points quarter-over-quarter from Q1 due to price discipline and a better product/customer mix. This increase was achieved in spite of our increased use of air freight and higher supply chain costs. On a year-over-year basis gross margins were down 240 basis points due to a discrete cost recovery event in Q2 of last year and higher freight and supply chain costs in the current year. Turning to operating expenses, Q2 OpEx on a GAAP basis increased 3% quarter-on-quarter and 14% year-on-year to $113 million. On a non-GAAP basis, operating expenses increased 2% quarter-on-quarter and increased 15% year-on-year to $103 million. The year-on-year and quarter-on-quarter increases on a GAAP basis were driven by higher personnel costs and increased headcount; higher stock compensation expense and lower research and development NRE credits. The year-on-year and quarter-on-quarter increases on a non-GAAP basis were driven primarily by higher personnel costs and the increased headcount and lower research and development NRE credits. Other Income & Expense included interest -- including interest expense was a $1.8 million expense, as compared to a $0.8 million expense last quarter. The sequential change is mostly related to loss from remeasurement of our Taiwan Dollar loans to a weaker U.S. Dollar, so FX. This quarter the tax provision was $7.6 million on a GAAP basis and $10.9 million on a non-GAAP basis. Our non-GAAP tax rate was 18.5% for the quarter. Our tax rate for GAAP and non-GAAP purposes increased this quarter primarily due to a change in U.S. tax regulations. Lastly, our share of income from our JV was $0.2 million this quarter, as compared to $0.4 million last quarter. Q1 non-GAAP diluted EPS totaled $0.88, which was near the high end of the guidance range due to higher revenues and higher gross margins, partially offset by higher operating expenses. Cash flow used in operations was $53 million, compared to cash flow used in operations of $135 million in Q1, as we continued to build inventory to be in a position to meet the increasing levels of large orders from our customers and to mitigate the impact of supply chain disruptions. CapEx totaled $12 million for Q2 resulting in negative free cash flow of $65 million. Key uses of cash during the quarter included increases to inventory and accounts receivable, offset by cash provided from increased accounts payable, customer prepayments and deferred revenue. We did not repurchase any shares in the quarter. Our closing balance sheet cash position was $247 million, while bank debt was $100 -- was $316 million as we drew down on our bank lines of credit to increase inventory levels as we ramped production of new platforms globally. Turning to the balance sheet and working capital metrics compared to last quarter, our Q2 cash conversion cycle was 98 days, up from 94 days in Q1, which is above our target range of 85 days to 90 days due to higher inventories. Days of inventory was 118 days, representing an increase of four days versus the prior quarter. Days sales outstanding was down by four days to 37 days, while days payables outstanding was down by four days to 57 days. Now turning to the outlook for our business, we note that our Q3 March quarter typically has some seasonal impact from the Lunar New Year holiday and we are also carefully watching impacts to the supply chain from Covid-19 related disruptions. We expect net sales in the range of $1.1 billion to $1.2 billion, GAAP diluted net income per share of $0.58 to $0.81 and non-GAAP diluted net income per share of $0.70 to $0.90 for the third quarter of fiscal year 2022 ending March 31, 2022. We expect gross margins to be up slightly from Q2 levels. Our GAAP operating expenses are expected to be approximately $118 million and include $8.5 million in stock-based compensation and $1.7 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense, to be a net expense of roughly $2 million and expect a nominal contribution from our joint venture. Non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D and higher personnel costs. The company’s projections for GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 15%, a non-GAAP tax rate of 16.5% and a fully diluted share count of 54.5 million for GAAP and 56 million shares for non-GAAP. The outlook for Q3 of fiscal year 2022 GAAP diluted net income per common share includes approximately $8.5 million in expected stock-based compensation and $1.7 million in other expenses, net of tax effects, that are excluded from our non-GAAP diluted net income per common share. We are maintaining our revenue guidance range of $4.2 billion to $4.6 billion for the fiscal year 2022 ending June 30, 2022, and our GAAP diluted net income per share outlook of at least $2.77 and non-GAAP diluted net income per share of at least $3.20. The company’s projections for GAAP net income assumes a tax rate of 15% and a rate of 17% for non-GAAP net income. For fiscal year 2022, we are assuming a fully diluted share count of 54.1 million shares for GAAP and 55.6 million shares for non-GAAP. The outlook for fiscal year 2022 fully diluted GAAP earnings per share includes approximately $37 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal third quarter of ‘22 -- 2022 to be in the range of $5 million to $8 million. Nicole, I will turn it back to you. Nicole Noutsios: Operator, we can now open the line up for questions. Operator: Your first question comes from the line of Ananda Baruah with Loop Capital. Your line is open. Ananda Baruah: Yeah. Hey, guys. Good afternoon. Thanks for taking the question and congrats on the ongoing momentum and the nice results. Congratulations on the good execution. A couple if I could. It -- so -- how is linearity through the quarter, revenue linearity and any context around new kinds of, like, new customer, like, customer expansion, workload expansion, things of that nature, would be really helpful? And then I have a quick follow up. Thanks. Charles Liang: Yeah. Thank you for the question. As you know, we just migrating from a Hardware Solution company to a Total IT Solution company. So lots of customer like our complete solution for the auto-ID need. So we continue to gain some really large customer and some really technology leader. So we are very happy, very excited to service more partner in the industry. And that’s really help… D And then… Charles Liang: Yeah. Go for it. David Weigand: Okay. I was just going to add that, customer wise we had really good growth in the telco and the 5G/telco vertical. Ananda Baruah: Okay. Charles Liang: Essentially, like, as opposed to like an Omniverse, and Metaverse, lots of very exciting opportunity there. Ananda Baruah: Charles, do you think it sounds like Meta, correct me if it’s not an accurate interpretation. But does that to say that telco picked up incrementally in December quarter and that new energy, you think is going to continue at least kind of March quarter first half of the -- first half of the calendar year here? Charles Liang: I mean, March quarter, traditionally, is our kind of soft season, but this year is different, because we have very strong demand, especially likewise, say GPU, Metaverse, Omniverse, lots of opportunity there and we already have some large engagement just try to fulfill them. Ananda Baruah: Okay. Great. That’s helpful. A quick follow up Charles. Any comments… Charles Liang: Thank you. Ananda Baruah: … on demand after the June quarter? I just asked that since we’re coming up on the second half of the year, any context you can provide, second half of the calendar year on sales demand? Thanks. Charles Liang: Yeah. There is woman looks pretty commendable , because of our strong product and Total IT Solution, lots of customer now have a bigger back order with us. So we are increasing our back order kind of in a very commendable way. Ananda Baruah: Excellent. Okay. Thanks a lot. I’ll get back in the queue. Operator: Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open. Mehdi Hosseini: Yes. Thanks for taking my question. Just want to get a further understanding how you’re managing the inflationary trend in component prices, your inventory has gone up for two consecutive year and by about $350 million over the past six months. But then I look at your revenue guide for March and implied guide for June taking the midpoint of the fiscal year guide, it does suggest a sequential decline. And is that because you’re not able to pass on extra cost or you just been conservative, despite the fact that you have built inventory or is there something else that I’m missing here? And I have a follow up. Charles Liang: Yeah. Indeed, I’m very happy with a big inventory now, with global supply chain difficulty. We build the inventory based on our back order. And at this moment, indeed, our back order have been very strong. And the reason why we did not update the whole year revenue and earnings, just because there are still certain uncertainty -- there’s still some uncertainty in terms of supply chain. Other than that, we feel very optimistic. Mehdi Hosseini: Just on the supply … Charles Liang: And… Mehdi Hosseini: Go ahead, sorry, go ahead. Charles Liang: Yeah. Our inventory indeed happened to have in a very healthy, very conservative way. David Weigand: Yeah. And Mehdi, this is David. Just to answer your question, another question that you had. Our ability to pass on costs is really reflected in our increased gross margin. So those increase component costs are being passed on. Mehdi Hosseini: Got you. Okay. And then, excuse me, if I were to go back to the three buckets that you highlighted, organic OEM and 5G/telco. Thanks for providing the dollar revenue contribution. Can you also give us sequential and year-over-year changes for each bucket? David Weigand: So, Mehdi, we didn’t go back to the Q2 of last year, I don’t believe, although, in our -- we have guidance in our slides that we have by quarter. Yeah, that’s available on our website. Mehdi Hosseini: Okay. But can you -- maybe you can provide some qualitative comments as to which bucket was the strongest? David Weigand: Absolutely. So our organic enterprise and channel and AI/ML constitutes approximately 65% of our revenues. The OEM appliance bucket comprises about 25%. And then the, look the data center, I’m sorry, the 5G/telco and Edge is about 10%. And that’s up from 5% in the prior quarters, the 5G/telco and Edge bucket. So that’s the way -- that’s kind of been the trend over the past quarters. Mehdi Hosseini: So the 5G… David Weigand: The big change though… Mehdi Hosseini: Oh! Go ahead. David Weigand: The big change was in 5G. Yeah, was from really some from big growth and traction with telco customers. Mehdi Hosseini: Okay. Thank you. Patrick Wang: Hey, Mehdi. This is Patrick. I want to just come back to one thing that you mentioned earlier in your question, which is the implied guide for June. I wouldn’t read what we’ve done here as implied guidance for June. What we said was, we’ve given guidance for what we expect in March, given -- just given our situation today, we’re not -- we’re actually just maintaining that the full year guidance there. We feel very comfortable with it, of course, right? But we’re not actually guiding another quarter out, which is why we just -- we kept it where it was. Mehdi Hosseini: Got it. David Weigand: Yeah. And the thing… Mehdi Hosseini: Go ahead. David Weigand: Yeah. I am sorry. This is David. So I will add to that, that we have -- we have a range, we put out a range of 4.2 to 4.6. So we’re very comfortable there, sure. Mehdi Hosseini: If I may just quickly, there’s also continued mismatch for components with supply and demand. There’s still some mismatches. So would it be fair to say that you’re also conservative, given the mismatches of availability of components? Charles Liang: You can say that… Mehdi Hosseini: Okay. Charles Liang: … kind of, the back order is stronger by now. We tried to be fully conservative, in case… Mehdi Hosseini: Got it. Thank you. Operator: Your next question comes from the line of Nehal Choski with Northland Capital Markets. Your line is open. Nehal Choski with Northland Capital Markets. Your line is open. Nehal Choski: Yeah. Sorry. Thank you. I was on mute here. Congrats on the solid results and well above difference March Q guidance. This question has already been partially answered by Patrick. But let me put a little bit finer point on this here. Why not at least narrow to fiscal year 2022 revenue guidance range given that the unchanged midpoint guidance does apply effectively about flat year-over-year for the June quarter? Charles Liang: So, our -- Nehal, our demand has never been stronger. And so we have obtained some new logos, new customers, which have designed in our products and so we feel very strong about our back order and our demand, but this is a market where supply also dictates your forecasts. And so we have to be careful about forecasting two quarters out on supply. So that’s really the reason for our range. Nehal Choski: Understood. Okay. And then, yeah, slide nine is great. I love the fact that we’re getting five quarter back visibility into these three vertical markets and it certainly does imply that 5G/telco and Edge has very significant year-over-year growth. And Charles, you’ve mentioned that, part of this demand is Metaverse/Omniverse, not sure what Omniverse means, but I do know what Metaverse means. And I guess… Charles Liang: Yeah. Nehal Choski: …I was in impression that Metaverse at least would go under the rep category, i.e., large data center, not 5G/telco. Can you just give me a little bit more understanding as to why Metaverse potentially falling into the telecom here? Charles Liang: Today there are some really four class company, big company coming to Omniverse or Metaverse, right? So we have a very strong engagement with some of them. So in terms of AI, GPU, Metaverse, we have a very strong back order now indeed and just try to work out components to fulfill over the demand. As to 5G/telco, it’s relatively new territory for us. We start 5G/telco about three years ago and now we have many bigger engagement. So we are very excited for 5G/telco growth as well. Nehal Choski: Okay. So to be clear then the commentary about the strong demand for Metaverse is not related to 5G/telco, correct? Charles Liang: Not necessary. It’s kind of not much related. Nehal Choski: Okay. Got it. Then, so at the Investor Day, about a year ago, you talked about the 5G/telco opportunity. There’s long design cycles, long qualification cycles. And it does look like this quarter the dam broke basically. What percentage of your telecom customers you’re engaged with went from qualifying to production ship? Charles Liang: A big portion. Indeed, as I just mentioned, we start 5G/telco about three years ago and then we have a very strong engagement so far and some of them start to move certain volume, some modem will move good volume later. So it’s a new territory, but we overall very satisfied with a big engagement from those partner. Nehal Choski: Okay. Great. And then my last question is that, also on these vertical markets, it does imply that the OEM appliance on large data center was up only 10% year-over-year, why is that? Charles Liang: Indeed, we have some large engagement and they are kind of high value product now. As we mentioned, for really kind of meta-scale data center we are selective, but when those demand high end, kind of high value products. So we are indeed very excited. We start to gain some of those opportunities. Nehal Choski: Okay. Thank you. David Weigand: Also… Nehal Choski: Yeah. David Weigand: This is -- yeah. I’ll add that, that -- the large data center vertical, I think, is going to there -- is going to vary a little bit by digestion, too, because we have some regular customers that are purchasing -- they’ll purchase for two quarters or three quarters, and then they’ll take up -- and they’ll take a pause. But the good thing about our business is that, it’s grown to the point where we have enough momentum in all areas that, that one vertical can offset the other. Nehal Choski: Great. Thank you. Operator: Your next question comes from the line of Jon Tanwanteng with CJS. Your line is open. Jon Tanwanteng: Thank you. Good quarter guys and on the outlook, too, very fast. My question is, are inflation and supply chain headwind still accelerating in Q3 for you and that’s maybe matched by your pricing or was it roughly the same as Q2 and maybe as a subset to that could you tell us what were the friction in this quarter, if it’s any different and if you see any easing or things getting tougher? Charles Liang: Now question is that, most of our customer already get used to kind of take the responsibility for the extra cost. So that’s why our gross margin or net margin will basically get in a stable right, including a higher transportation charge, basically customer already accepted it. Jon Tanwanteng: Okay. Great. Any commentary on where the friction is in components and shipping? Charles Liang: Overall supply chain situation have been, I would have to say, gradually improving, not much improving, but gradually improving. So we get in feel more comfortable then last quarter or before? Jon Tanwanteng: Okay. Charles Liang: It was still a big concern, yeah. Jon Tanwanteng: Got it. Charles, you spent a little time earlier in the call talking about the Total IT Solutions transition, could you just tell us what the margin is like in a typical Total IT Solution sale versus a historically pure hardware sale? Charles Liang: Okay. I mean, our total hardware, that’s the model we have as -- we had to compete with lots of competition, right, lots of competitor. But Total IT Solution, customer need lots of software, lots of security feature and kind of like a cloud plug and play, cloud composite waiver software and utility there . So we invest a lot in this territory in last three years and now we start to harvest the results and we continue -- we will continue to invest more in software. So our kind of software value, Total IT Solution value will continue to grow. I would like to say, gradually, we may be able to add 1%, 2% or even 3% actual profit -- net profit to our revenue in next few quarter or few years. Jon Tanwanteng: Okay. Great. And that’s -- that was part of your Investor Day target within the target model, correct? Charles Liang: Yes. Jon Tanwanteng: Okay. Understood. Thank you. Charles Liang: Thank you. Operator: Your next question comes from the line of Ananda Baruah with Loop Capital. Your line is open. Ananda Baruah: Hey, guys. Thanks. Thanks for the follow up. I have a couple if I could. Charles just going back to your comments just moment ago about imposing constraints that you actually, as you said, they are actually becoming less constrained right now. So just a clarification? Charles Liang: Data feed -- data under control, but still some concern, especially… Ananda Baruah: Okay. Got it. Charles Liang: … for a complete IT solution, right, even sometime, you just have one component in shortage and you cannot ship the whole product line, whole solution. So that’s why it’s improving but still lots of concern. Ananda Baruah: Understood. Understood. Helpful. And then on the gross margin, you guys talked about reaching 14% in June. So it sounds like you’re tracking ahead of that and then you guided sort of up sequentially, how like -- how should we think about gross margin kind of going forward post the March quarter, I guess, trajectory wise and what are the put and takes. Just -- I think you guys have talked about sequential up December, sequential up March and sequential up June to get to 14%. And so now that you’re already there, can you give us some sense of what the personality of gross margin should look like in the coming quarters, appreciate it? Charles Liang: Yeah. Basically, when our Total IT Solution become more mature, gross margin and net margin will consistently growing, that’s benefited very slowly the direction. But in some time -- and I hope it happens, sometime when we engage with large scale ASP or OEM in really high revenue deal that may impact our gross margin and net margin. Although, it’s though our overall margin, but when it’s positive to company, overall future, we will still selectively take some deal there. Ananda Baruah: Okay. Great. Thanks. Thanks, guys. I appreciate it. Charles Liang: Thank you. Operator: Your final question comes from the line of Mehdi Hosseini with SIG. Your line is open. Mehdi Hosseini: Yes. Thanks for the follow up. Just a modeling follow up. If I take $3.20, minimum of $3.20 EPS guides for FY 2022 and assume $0.80 for March then my June EPS would be up over $0.90. So you are expecting margin expansion from June -- from March to June, is that the right way of thinking about to get to the $3.20 minimum EPS for FY 2022. David Weigand: So -- go ahead, Charles. Go ahead. Charles Liang: Yeah. Basically, June, always our kind of harvest season, right. So this year, I believe, same opportunity. June will be very strong quarter I believe. And so as to gross margin maybe a little bit lower. But if that happen, the net profit should be more than $0.90, maybe more than $1. Maybe you have some come in there. David Weigand: Yeah. Mehdi, so we -- we’re very comfortable being inside 14% to 17%. That’s our target. We’ve guided up for Q3 at higher margin. We said we should be up slightly in Q3 and for Q4 we -- we’re not giving updates on Q4. But for the full year, as we said before, very comfortable with the guidance that’s out there, because it’s got a -- it has a low range and high range. Mehdi Hosseini: Got it. Thank you. Operator: There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect.
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Following Supermicro's robust guidance for Q4/23 and Q1/24, analysts believe the company's performance outlook has shifted from easily surpassing low market expectations to having less opportunity to exceed already high expectations.

Nomura's revised outlook is influenced by uncertainties around the gradual easing of CoWoS-S supply constraints in 2024 and the potential transitional phase between Hopper and Blackwell GPUs in the latter half of the year.

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Nomura anticipates Supermicro’s quarterly sales to align with its guidance of $5.1-$5.5 billion, noting that some liquid cooling projects have been deferred to later quarters, reducing the likelihood of surpassing the guidance.

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Super Micro Computer's Strategic Focus Amid Market Volatility

Super Micro Computer (SMCI) recently made headlines with its decision not to preannounce its financial results for the March quarter, a move that diverged from its usual practice and led to a significant drop in its stock price. This decision, coupled with broader market reactions and comparisons to its semiconductor peer ASML, has stirred concerns among investors and analysts alike. Despite these challenges, the company's focus on the artificial intelligence (AI) hardware market and its impressive financial performance in recent quarters suggest a nuanced picture of its current situation and future prospects.

The absence of preliminary financial guidance for the March quarter has been a key factor in the rapid decline of Supermicro's shares, which fell by nearly 20% on a single day. This reaction was largely due to investor concerns over the lack of visibility into the company's performance, as highlighted by Aaron Rakers, an analyst at Wells Fargo. The market's response was further influenced by ASML's subdued future guidance, which contributed to a cautious sentiment across the semiconductor sector. Despite these factors, Wells Fargo maintains an "equal weight" rating on SMCI, with a focus on the company's strong position in the AI market expected to drive significant earnings growth.

On the financial front, Supermicro has shown remarkable growth, with revenue, gross profit, and net income all posting substantial increases. The company's operating income growth of approximately 115.33% is particularly noteworthy, reflecting efficient operational management and profitability. Additionally, the asset growth of about 31.96% indicates a solid expansion in the company's asset base, which is crucial for sustaining its growth trajectory in the competitive AI hardware market.

However, the company faces challenges in cash generation and liquidity, as evidenced by the sharp declines in free cash flow and operating cash flow growth. These declines raise questions about Supermicro's ability to maintain its investment in growth and innovation without compromising its financial stability. Despite these concerns, the increase in book value per share growth of roughly 39.36% and a significant rise in debt growth suggest that the company is leveraging its assets and financing options to fuel its expansion.

In light of these developments, analysts like Ananda Baruah from Loop Capital Markets have set optimistic price targets for SMCI, with a street high of $1,500, indicating a potential upside of approximately 69.92%. This optimistic outlook, based on Supermicro's strong financial performance and strategic focus on the AI market, underscores the potential for the company's stock to recover and grow despite the current market volatility and investor concerns.

Super Micro Computer's Stock Downturn Amidst AI Sector Challenges

Super Micro Computer's Stock Performance Amidst Market Challenges

Super Micro Computer (NASDAQ: SMCI) has faced a challenging period, with its stock price experiencing a significant downturn, shedding over 26% from its peak earlier this year. This decline is part of a broader bear market phase that has also seen the Nasdaq 100 index fall by 2.67% and the Dow Jones by 4.78%. The downturn in SMCI's stock is reflective of a wider retreat in technology stocks, especially those in the artificial intelligence (AI) sector. This sector has been hit by what's termed as AI fatigue, leading to notable declines in companies like Nvidia, which saw its stock price decrease by 10% from its yearly high. Other AI-focused companies, such as C3.ai and SoundHound AI, have faced even steeper declines, highlighting the sector-wide impact of this trend.

The bearish sentiment surrounding SMCI can also be attributed to the Federal Reserve's current stance on interest rates, which have been adjusted in response to ongoing high inflation rates in the U.S. This shift towards a less accommodative monetary policy has particularly impacted growth-oriented companies like Super Micro Computer, as higher interest rates can dampen investment and spending in technology and growth sectors.

Despite these challenges, there is a significant anticipation around Super Micro Computer's upcoming financial results announcement on Thursday. Analysts have set high expectations, predicting earnings of $5.84 per share for the current quarter, with a forecasted increase to $7.19 per share in the next quarter. Revenue projections are also optimistic, suggesting a jump to $4.01 billion from $3.6 billion in the previous quarter, which would represent a substantial growth from $1.28 billion in the same quarter of 2023. These projections indicate a strong demand for AI chips and a potentially positive performance for the company.

Looking further ahead, revenue expectations for the upcoming quarter stand at $4.91 billion, with an annual revenue forecast of $14.6 billion for this year, expected to rise to $20.7 billion next year. These figures suggest a positive outlook for Super Micro Computer, contingent on the company meeting these projections and providing encouraging forward guidance.

In the current market, SMCI's stock price is at a crucial juncture, having fallen below $900 from a March peak of $1,230. The stock is hovering just above the 50-day Exponential Moving Average (EMA) and has found support at $854.91, marking its lowest point since March 20th. With the stock maintaining its position above an ascending trendline, the immediate outlook remains neutral. Key support and resistance levels for the stock are identified at $800 and $1,000, respectively, indicating critical points that could determine the stock's direction in the week ahead.