Super Micro Computer, Inc. (SMCI) Q4 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Super Micro Fourth Quarter and Full-Year Fiscal 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Nicole Noutsios, Investor Relations. Please go ahead.

Good afternoon and thank you for attending Super Micro's call to discuss financial results for the fourth quarter and full year fiscal 2021, which ended June 30, 2021. 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 in the IR section of the company's website under the 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 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 2020, and our other SEC filings. All of these documents are available on the IR section 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 or 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 in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts to ask questions. I'll now turn the call over to Charles Liang, Founder, Chairman and CEO. Charles?

Thank you, Nicole, and good afternoon, everyone. I am pleased to announce that for the first time our quarterly revenue has exceeded $1 billion. For fiscal Q4 2021, we delivered year-over-year revenue growth of 19.3%. For the whole fiscal year 2021, our revenue grew 6.5%. We have gained market share and finally resumed fast growth starting from March quarter this year, after the impact from the past 10-K delay and COVID19 challenges. The revenue growth was driven by some wins from large enterprise customers and large multi-nation high-tech companies. These customers choose Super Micro because of our green computing technology, faster time-to-market, and plug-and-play total IT solutions, especially in appliance, Cloud, AI and 5G markets. Now, let’s look at some key highlights from the quarter. Our fiscal fourth-quarter net sales totaled $1.07 billion, up 19.3%, both year-over-year and quarter-over-quarter, at the top end of our guidance range. This growth rate, I believe, is much higher than that of the industry. All our major geographies contributed double-digit year-over-year quarterly growth. Our fiscal fourth-quarter non-GAAP earnings per share was $0.81, up from $0.68 same period last year. We saw a significant increase in sales from new and existing large, high-profile customers. Our strong momentum is mainly driven by our business expansion from hardware solution to total IT solution that consists of hardware, software, and services. We have doubled our software engineering resources in the past 24 months to allow us to swiftly execute this plan. Through engagement and close collaboration with strategic leading hardware and software partners, we have provided our customers fully optimized, tested, certified, and ready-to-deploy reference architectures. As a result, large volume orders are deployed timely without customers’ having to go through complicated processes of hardware validation, software compatibility, and supply chain disruption. It’s a win-win for everyone. Earlier in fiscal Q4, we successfully executed the launch of Intel Ice Lake, AMD Milan and NVIDIA A100 GPU based product lines and began to ship more than 200 application-optimized product solutions. They are all based on the strong foundation of our Server Building Block Solution. These optimized systems are created in-house, leveraging close to three decades of subsystem innovations, including motherboards, enclosures, power supplies, and cooling technologies. What’s more, our security and management software empower customers to deploy, manage and scale in a timely manner from enterprises to hyperscalers. On the product side, our new Ice Lake-based X12 generation multi-node solutions have gained great tractions among customers who are looking to scale out their enterprise and cloud datacenters. From SuperBlade, MicroBlade to BigTwin, FatTwin and the upcoming GrandTwin, all these resource-saving product lines support dense NVMe and Optane persistent memory, flexible GPU and FPGA configurations, providing optimal performance and the best TCO to a variety of customer workloads. Our GPU product lines are continuing their strong growth with the explosion of AI/ML application demands. These new Ice Lake and Milan-based GPU product lines support larger on-GPU memory and accelerate compute intensive applications. Our 2U 2-node GPU system has proven to be a top-seller since its introduction, thanks to its optimal mix of CPU-to-GPU ratio and resource-saving features. Later this year, we’ll be introducing a brand-new Universal GPU product line that will provide even more flexible configurations for many different CPU and GPU modules combination, further push the limit of system density and performance up to 50% when compared to competition. Announced in June during Computex 2021, the Plug & Play Rack product line is an integral part of our complete solution strategy going forward. These turn-key racks have undergone a thorough, solution level design and validation process and built securely for our AI, 5G/Telco, enterprise, cloud, and storage customers. Upon receiving these total IT solutions, customers only need to connect power and networking, then they are immediately ready to run their applications, shortening the time from making decisions to seeing results. To further improve sales and operations efficiency, we will launch our auto-configurator tool to enable B2B/B2C automation, which will be broadly ready to service our customers in the coming few weeks. This tool makes it faster to achieve product optimization and more efficient to leverage configurations among our sales, engineers, and customers. We recently completed our Taiwan campus expansion. Now with the total 3 million square feet campus in Taiwan, we are equipped to deliver not only sufficient capacity, supply chain resilience, but also lower cost structure. Combined with manufacturing facilities in Silicon Valley and the Netherlands, Super Micro is well positioned to grow market share with economy of scale, agility, quality and rapid delivery time. To satisfy our customers' fast-growing demands, we are working aggressively across our global supply chain to mitigate critical parts shortage. In summary, Super Micro has been solidly transforming into a total IT solution company from a server hardware company. In addition to providing the greenest hardware total solution, our software and service products are now ready for large enterprise, cloud, AI and Telco customers. Second, our Taiwan campus expansion doubles our solution capacity and lowers our cost structure. Now if we decide to do so, we can start to reduce our expense in Silicon Valley HQ. Third, our business automation program, including the auto-configurator and B2B/B2C systems, will significantly improve customer experience by streamlining customer configuration and order process, resulting in shortened solution delivery time with better quality and optimization. With that as a summary, I believe our fiscal year 2022 revenue will reach at least $4.3 billion and start to grow much faster than our past four years. In closing, I am pleased with the progress of our business transformation, which has started to speed up our business execution in fiscal '21. As a total IT solution company, we are now able to grow business much more efficiently and achieve our $10 billion of revenue goal quicker, perhaps we are able pull in from 2026 to 2025 or even sooner. With that, I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional details on the quarter.

Thank you, Charles. We continued to accelerate in all major areas of the company and exceeded $1 billion in revenue for the quarter, which was at the high end of our guidance range. Growth was driven by wins from large enterprise customers and key high-tech companies worldwide, continued strength across all major geographies and solid demand for our products and services. Our fiscal fourth quarter revenue totaled $1.07 billion, reflecting a 19% increase both on a year-on-year and quarter-on-quarter basis. Looking at Super Micro's Q4 revenue in our three market verticals, we achieved $672 million in organic enterprise and channel AI and machine learning vertical, $366 million in OEM and large data center vertical, and $31 million in 5G/Telco and Edge/IoT vertical. Systems comprised 78% of total revenue and the volume of systems shipped was up year-over-year, while the nodes shipped were down year-over-year. System ASPs increased year-over-year and quarter-on-quarter. Performance was strong across all major geographies this quarter. On a year-on-year basis, Asia increased 25%, U.S. increased 21%, and Europe increased 13%, while Rest of World decreased 3%. On a sequential basis, U.S. sales increased 30%, Europe increased 14%, Asia decreased 1%, and Rest of World increased 7%. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q4 gross margin was 13.7%, down 30 basis points year-on-year and 10 basis points quarter-on-quarter. We expected our Q4 gross margin to improve 70 basis points due to discreet costs incurred in Q3. As expected, those costs did not repeat in Q4, however expedite fees and shipping costs increased by 50 basis points quarter-over-quarter. As reported by many other companies around the world, supply chain pressures related to the resurgence of variants of COVID-19 persist. Turning to operating expenses, Q4 OpEx on a GAAP basis was essentially flat quarter-on-quarter and decreased 7% year-on-year to $106 million. The decrease year-on-year was caused by a decrease in incentive bonuses, offset by higher headcount this year, primarily in R&D. On a non-GAAP basis, operating expenses increased 4% quarter-on-quarter and increased 9% year-on-year to $99 million. The quarter-on-quarter and year-on-year increases were related to headcount and other personnel costs as we continue to invest in human capital to address our growth opportunities. Other income and expense including interest expense which was a $2.1 million loss as compared to a $1.4 million gain last quarter. The sequential change is mostly related to FX. This quarter our tax benefit was $1.6 million on a GAAP basis and an expense of $1.8 million on a non-GAAP basis. Our non-GAAP tax rate was 4% for the quarter. Lastly, our share of income from our JV was $0.6 million this quarter as compared to a loss of $0.3 million last quarter. Q4 non-GAAP diluted earnings per share totaled $0.81 as compared to $0.50 in Q3 of fiscal 2021 and $0.68 in the same quarter of last year. Cash flow from operations totaled $64 million compared to cash flow used in operations of $124 million in Q3. CapEx totaled $13 million resulting in free cash flow of $50 million. Key uses of cash during the quarter included increases to inventory and receivables while key providers of cash included an increase of $144 million in accounts payable and $12 million in deferred revenues. The increase in deferred revenue was due to higher sales of our service contracts. We also used $12 million to repurchase shares in the quarter. Our closing balance sheet cash position was $232 million, while bank debt was $98 million, resulting in a net cash balance of $134 million. Turning to the balance sheet and working capital metrics compared to last quarter, our Q4 cash conversion cycle was 80 days, which from down from 86 day in Q3, beating our target range of 85 to 90 days. While the absolute level of our inventory increased, days of inventory at 96 days decreased. Days Sales Outstanding was 37 days while Days Payables Outstanding totaled 53 days. Now turning to the outlook for our business. We expect net sales in a range of $900 million to $980 million, which resulted in GAAP diluted net income per share of $0.16 to $0.36 and non-GAAP diluted net income per share of $0.28 to $0.48 for the first quarter of fiscal year 2022 which ends September 30, 2021. We expect gross margins to remain at similar levels sequentially, with upside potential as we manage supply chain costs and maintain price discipline. Over the upcoming quarters, we expect to achieve margins within our target model as we further scale our Taiwan operations and begin to gain traction from our new product offerings and auto configurator B2B and B2C solutions. GAAP operating expenses are forecasted to be approximately $110 million and include $7 million in stock-based compensation expenses and $1 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense, to total roughly $2 million and expect a nominal contribution from our JV. Non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D, lower NRE expected and higher personnel costs. The company’s projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 53.7 million shares for GAAP and 55.0 million shares for non-GAAP. The outlook for Q1 of fiscal year 2022 GAAP diluted net income per common share includes approximately $8 million in expected stock-based compensation and other expenses, net of taxes, that are excluded from non-GAAP diluted net income per common share. We expect net sales in a range of $4.1 billion to $4.5 billion, GAAP diluted net income per share of at least $2.60 and non-GAAP diluted net income per share of at least $3 for fiscal year 2022 which ends June 30, 2022. The company’s projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 55.3 million shares for GAAP and 56.5 million shares for non-GAAP. The outlook for fiscal year 2022 GAAP diluted net income per common share includes approximately $30 million in expected stock-based compensation and other expenses, net of taxes, that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal first quarter of 2022 of approximately $14 to $16 million. Nicole, I’ll turn it back to you for Q&A.

[Operator Instructions] Your first question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Yes, thanks for taking the question. I had a couple follow-ups if I was to take the midpoint of guide range for fiscal year 2022. It seems like maybe there is a little bit of a, leverage in operating profit in other words, maybe a 200 basis points of improvement to get $3 of earnings. What I want to understand is, what are the key assumptions for component costs is this a base case or very conservative case? And I have a follow-up to that?

I would rather say, it’s based on conservative base because supply chain continued to very tight. And although we have a good relationship with all, of our supplier but anyway its global incentive program so it’s a conservative base, but because our operation now is able to genetically expanded to Taiwan so - well though overall cost.

Right so where is the most - what segment of the supply chain you're experiencing the most shortage? What are the key components that you're relatively have - the most difficult time procuring?

IC chip especially IO chip.

Okay. And question on the cash flow what was the depreciation, amortization for the reported June quarter and what should be assume for fiscal year 2022?

I’ll get back to Mehdi on this.

Okay. Given the CapEx growth in fiscal year 2021 on the $60 million and the buildup of the Taiwan facility, should we expect CapEx to moderate from here?

Absolutely, yes because our Taiwan operation is pretty much ready we add about 200 staff in Taiwan in last year month and all the people have been well trained. And they just moved into the new building last month. Other than that, now free information as we just mentioned for B2B/B2C and order comes later. We hire people and same people and they are about always and start to offer our service to certain customer. And we will over the year apply to all the customer in the next few weeks.

Okay great. So I’ll get back in queue?

My investment, have been there…

So Charles, are you implying that the CapEx should decline in fiscal 2022?

Maybe because we are growing I mean, 2022/2023/2024 we expect continue to grow so I guess the operation expense won’t shrink it may grow very kind of consistent - very limited growth because we already invested there.

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

Yes thank you and congratulations on strong results especially the free cash flow we’re expecting a drain based on this commentary for last quarter and enjoy very nice free cash. It’s looks like the big delta relative to our expectation with an increasing base payable and given this environment of trained component environment. I mean, how is it pulled off basically?

So now we did have a lot of inventory that came at the near end of the quarter. And so that's what caused accounts payable to rise and with a result in rise in DTO.

Okay.

And now I can see there is a positive so keep kind of high inventory because we strongly believe customer needed those products.

And so by the yes….

Go ahead sorry please?

All right, you can tell from our forecasts from our revenue forecast that our sales are not dipping as they traditionally do in Q1. And so therefore, we needed to have more inventory on hand, which was why, I alluded to the challenges of cash flow for this projecting cash flow for Q4. But we ended up in a good position.

I see so I guess because we built up the inventory, at the end of the quarter you’re satisfied a strong demand, you're seeing the September quarter and the balance sheet is showing up as increased base payable. But what you're saying is that base payable terms actually didn't increase, this is simply the timing of which you received the inventory.

That's exactly right.

Got it okay understood okay. And I don't recall last time you gave full-year guidance. I'm not sure if you have before, but certainly I don't think you did during fiscal year 2021 or fiscal year 2020, or past few years, one year in 10-K filing delay held. So what has changed to give you visibility guide on the full year basis, and importantly, almost 10% of that the consensus estimate?

Not much reason, but pretty much because we have a successful expansion in Taiwan, and also are build in business automation, including the auto congregator and B2B, B2C tool. And also a company expanding from a hardware solution company to total IT solution company. So we saw it’s a good idea to open the market, kind of more completed picture for a whole year and for the future.

Okay all right. And this midpoint 20% growth guidance for fiscal year 2022 is this tied to any sort of - and server industry growth expectation?

I'm sorry, what was the last part of your question is it tied to what?

Is it tied to server industry growth any sort of server industry growth expectation or is it independent of server industry growth?

Not quite, not quite. As we mentioned, we had returned to faster growth faster in other model. If you remember, before 2017, we were attending delays our growth always had been two times to four times faster than our industry. And we believe we are returned to the faster growth being this model. So start from March and June last quarter, we start to outperform in our industry. And I believe we will start to outperform in our industry growth rate maybe double or triple or even more, looking forward. So we are very much here in the lower.

Yes, undoubtedly, clearly but is there a particular industry growth rate that you are expecting an urge I got 20% year-over-year 5%, 10%, 2% share your thoughts on that?

We believe our industry may grow 5% to 10% and our growth it should be a double to our people over there operate.

Okay, great. And then my final question, is that the minimum $3 per share? Does that correspond to the low end of the revenue guidance, or to the midpoint of revenue guidance?

I rather say it’s a conservative number.

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

Good afternoon, guys. Thanks for taking the question and congratulations on the strong revenue execution and the visibility to put out a long-term word of fiscal year rough guide here? I guess a couple from me if I could, David, could you just walk back through the components that you spoke to on gross margin? I just want to make sure that I'm straight on those. And then I have a quick follow up as well.

Certainly, so when we finished last quarter at, you know at 13.8, we had some about 70 basis points of discrete costs, and which included some assumption costs as well. But mainly, it was principally streets and discrete costs that we didn't expect to occur. So this quarter, those did not occur. But we did have 50 basis points more of a shipping costs. And it was it was really caused by our directed effort to deliver product to our customers on time. And that’s what our customers expect and demand. So that’s really the reason that we were not able to raise margin occur. Just because these…

That’s cool. And so if you lost the 70 to that 13 to 13.1%, and then I got it and then you - sorry, you lost 70 and you gained 70 so that will take you to 14.5% or so, and then you had 50 more so that took you to - about to take you back down to 14%. And then was there, I think I’m doing that math right. Correct me if I’m wrong. And then was there an incremental 30 basis point headwind that brought it down to the 13.7%?

Well, there was. We had two things. One, we had deferred revenue that we added to our balance sheet of about $12 million. So we had to carve-out some income for our services. And we also had, just the rest was just product mix and…

Got it. Okay. And then, like how should we - what are sort of the pushes and the pulls? You may mentioned it in the prepared remarks that you expect in the coming quarters to move up into the 14% to 17% range. What are the pushes and pulls there? And if there’s any way to give them by order of magnitude, that would be helpful also.

Sure, absolutely. So, we realized that with the Delta variant, it’s hard to say that COVID is over. And so therefore, we expect to continue to have challenges on supply chain shipping costs. However, we do expect our other initiatives such as our transition over to Taiwan and our new product offerings, and especially in those verticals that have attractive - more attractive gross margins, as well as our B2B and B2C configurator. We expected benefit of those things to start to come to the business in the upcoming quarters. So in the short run, we know that Taiwan has gone online. However, it's going to take a couple quarters to start to realize benefits.

Any - can we - I’m sure I’m not the only one intrigued about this. Any chance you get you to give us some sense of - for fiscal 2022 what the gross margin could look like?

So we’ve given guidance on the top line and the bottom line. But we're not going - other than the fact that we expect gross margins to improve, we're not giving further guidance.

I got it. But it’s not unreasonable to think that you would be in the range by the end of the year – end of fiscal…

Yes. Our target is to go - and I think this is in the notes. Our target is to be back within our range during the year.

Our range?

Yes, our range by the way was 14% to 17%. Yes.

Yes. Appreciate it. I'll get back in the queue here. I appreciate it. That's really helpful. Thanks.

Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Thanks for taking the questions and congrats on the quarter. I’m just curious as the industry and not just you guys, but the industry in whole deals with supply chain shortages, semiconductor, IC shortages, et cetera. I’m curious on your side of the business. Have you been able to invoke your own customers to provide you with extended lead times and has that provided you with better visibility? And then on the heels of that kind of tied to that question is, is the guidance for this current quarter assuming that you would have actually outperformed that number if you were able to get all of that - all of the supply to meet demand? Put it another way, are you able to meet demand as you see it in the current quarter?

Very good question. Again, although it’s highly whatever possible we could, but still, we cannot get however we want. So we cannot shift all our demand to our customer. But I wanted to say, we can shift most of that, maybe customers still had weighted longer than regular time. And the going we have a loss of repeat customer, older customer. So they understand the global difficulty, so a longer lead times is people don’t like to see that, but basically they are cooperative. So we cannot shift wider customer need, but basically customer happy with our physical service.

And what is your current view of expectations of when that normalizes? Does your fiscal 2022 guidance reflect a view that the tightness in the semiconductor supply chain starts to normalize through this fiscal year or do you think it’s out further than that? Just curious of what your thoughts are?

Yes. I mean, as I shared before and now, traditionally, our growth story was double to quadruple faster than our industry. And I believe we already get back from that momentum. Double to quadruple faster than our industry. Now because of that the global shortage, that impact our growth a little bit for sure. And that’s why we are humbled to stay maybe $4.3 billion even now because of big shortage equivocally. I believe our growth will be a much better than that.

Yes. And then the final quick question is, there is a lot of architectural things going on in the server and the universe around semiconductors and so on. I’m curious of how - what kind of growth that you’re seeing in GPU accelerated server platforms. Do you think that there is a longer term narrative that we’re at the point where actually the richness of the server configurations can really drive a positive upward trend and blended ASPs for foreseeable future. I’m just curious to how you’re seeing compute architectures evolve that maybe benefits you guys from a growth perspective?

Yes. As a technology company based on Silicon Valley, we like technical challenge. We like new tech knowledge. That’s why a lots different CPU, a lots of different GPU, a lots of different platform, not to a big trends to us. And that’s why I just mentioned, we will introduce Grand Twin a brand new architecture to the market very soon. And we also examining a universal GPU platform and that will be ready by end of this year. So all of those is to provide the much more flexible kind of support on multiple different CPUs, vendor, multiple different GPU vendor, and different form factor. So all the platform we think will benefit our customers. And thank you to our building for solution, we are able to kind of optimize architecture and especially Grand Twin and kind of universal GPU solution. So we are very happy - really excited to see the opportunity.

Your next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Good afternoon, guys, and great quarter and also the outlook is pretty impressive. I wanted to drill down on the previous just on how you have confidence in that $4.3 billion in revenue. Is that a bottoms up analysis with like qualified customer leads indication of interest? Contracts that may have already been signed or is there more - or that you actually have to go out and get before you can achieve that? I’m wondering how you build to that?

It’s both bottoms up and top down from both direction we see the growth where it will be very strong. Again, it’s not because of global shortage. Our growth should be much better than that. And with better product with our current operation, and with also many more new engaged high profile customer we achieved in the last six months and currently. So we feel pretty optimistic of that.

And I was going to ask, how do you feel about your ability to pass price through in this environment? You talked about expedited shipping. I know that you were doing airfreight last quarter just to get things to customers on time. I would think that everyone knows at this point that it’s impossible to get things without paying of extra shipping charges. So I’m wondering if you’re running on surcharges or other pricing methods to be able to pass that through the customer. And if so, are they receptive to it?

Very good question and a complicated question too. So we try whenever possible to communicate with the customers. But overall, we have to absorb I would have to say at least 50% of that well maybe plus-50% percent of customer. So we tried to kind of provide a customer very cooperative way. So that we can grow much there as well.

Okay. Great. And maybe just one final one on pricing. When do you think you can catch up on pricing just to higher input costs? Is it a quarter or the two? How should we think of the lag time before you’re able to absorb all of that?

Again, it’s a complicated question because all the pandemic the airfreight still going on. So - but once the COVID-19 ends I believe will recover to normal. But before that, we are getting able to pass those overhead actual cost to customers. Likewise, they maybe 50-50 in in last quarter, and we will be getting better, but hopefully COVID-19 problem can be end very soon. So we will get back to normal automatically.

Your next question comes from the line Jon Lopez with Vertical Group. Your line is open.

I'm very sorry. That’s great. I had phone trouble. Sorry about that. Thanks, David. So I just have say two, I wanted to come back for a second to the fiscal Q1 guidance and maybe to come out this way. I thought in summer March you made you referenced like not declining in fiscal Q1. But I guess as we calculated actually a bit below your normal seasonal trending pattern and that’s after being pretty comfortably above that pattern in the last two quarter, so both fiscal Q3 and fiscal Q4. So, I guess my question is one are we looking at those numbers differently than you are maybe just set me through what you meant when you said not declining. And then two, is there any constraint on your revenue guidance relative to component or logistical issues perhaps if you can quantify that? Thanks.

Sure. I think that - I think what our range does is a range allow us for the struggles that we faced in the supply chain. So therefore, we feel like we provided a broad enough range that we can overachieve And we can also, but we feel comfortable with that range.

I guess one, the other factor is that because last year COVID-19 reason we didn't adjust the employees’ salary that much. So this year, we have a much bigger salary adjustment for employees. That's why we see Q1, Q2 you may see our expected growth, one of the portion because of salary adjustments, and also Taiwan expansion. So we hire people in Taiwan and train people, but they were ready to contribute to our revenue and profitability.

Okay, thanks. Yes, I guess that helps a bit. I guess my other question just to come back to the gross margin for a second. So to arrive at this $3 figure the north of $3 figure, especially based on what you're referencing OpEx there Charles, I mean the gross margin does need. I think, to be pretty close to 15%. As we get out of calendar Q3 and into the remainder of your fiscal year? I guess why do you think like, do any of these things feel as though you have line of sight to and ending as we look beyond calendar Q3? And if not, are you committing that you get to $3 some other way, like we rain back on OpEx or just maybe walk us through the interplay between why you might have comfort in the $3 number, if you don't have visibility to some of these logistical issues, or cost issues abating?

David [indiscernible].

Sure, so one of the things that helps our cost structure, again, is the movement of our production over to Taiwan. So that's, we expect that to give us - benefit, as well as the attraction in our new product offerings, which we expect to bring higher margins than the traditional server business. So those are the factors that we have insight into and give us confidence that in spite of, supply chain challenges, which we've managed to meet. And in spite of higher costs, which we you know, in terms of shipping and an air freight, which we've continued to deal with, we still believe that through, price management that we can achieve the margins, which will allow us to deliver the targets that we are forecasting.

Yes, the other way to answer your question more directly is that we explained our growth will be significant in fiscal year 2022 and 2023. And we are very confident to see that happen. But if in case it didn't happen, then that means we have too much resource now. So we may reduce some resources in USA quota. I hope we don't do so, but if we had to we will, and we have that option. So that will reduce our operation close over zero. I hope we don't need to go over that way.

We have a follow-up question from Mehdi Hosseini with SIG. Your line is open.

Thank you. Just a quick follow up. I want to get your view on current memory prices. How do you see the trend over the next one or two quarters? And I'm asking you about availability and pricing trends?

Very complicated question, but very good question is how to put in take, as at this moment, we see the availability is getting better than last quarter. So on a price changes should be better than before. And as to when the price will stop growing, or a price were going down. We watch very carefully. So at this moment, no clear date, but at least we feel it’s better than last quarter.

Thanks for the color. I know it’s very difficult to look beyond a couple of months. As you think about your FY '22 revenue guide, how should I think about incremental opportunities there? A lot of AI type projects that hyperscalers are expected to ramp. Do you think your FY '22 revenue guide captures some of them? Or should we wait for FY '23 to have a consistent and more meaningful material contribution?

Good question. I mean for AI, we - the rule we’re very aware in fiscal year 2021. And year 2022, I believe we will continue to grow very well, maybe more than 50%, I hope. Right. And for our telco. Telco is another territory we grew very well last year. And I believe this year 2022 our telco buildings will grow much better than even last year. So last year are still very strong area for us. As to hyperscaler, with our Taiwan operation now is ready. So we have a chance to start to service some hyperscaler customer if we select to. But I believe we will be very selective for some bid of customers, where we can provide a value, we will.

And Charles, when you talked about AI, does that includes kind of the arm based A6 CPU or do you lump that into the hyperscaler segment?

A very future question. But…

Right.

Yes, we have some - we have some arm design as well. Few customer already prefer arms submission. We have some submission there under the belt.

Okay. So when talk about AI it’s not necessarily an arm based solution it’s more general, right?

Many still are interior in the base -- in NVIDIA.

Sure. But when you referenced hyperscalers that's predominantly arm base solutions?

Not necessarily. I mean, as hyperscale to [indiscernible].

Okay. All right. Got it. Okay. So we can't really isolate that because perhaps it’s just too early to determine arm base - independent arm base solution, right?

When customer need it, we will be ready.

And for the last question we have a follow-up from Ananda Baruah with Loop Capital. Your line is open.

Thanks, guys for the follow-up. Yes. Just wanted to ask any context you could give us how we think about revenue seasonality during fiscal year 2022? Will there be a seasonal pattern or will it be. I mean, there will be a seasonal pattern but will it be different than usual fairly ratable on the year-over-year basis? Thanks.

Yeah. As you may know, right, September always now exceeding. So this year no exception, right? Although we have a strong demand but global shortage that major reason that we try to be conservative when we share the number with you for September quarter.

And then Charles, through the rest of the year, should we just assume typical seasonality to get to the - into the guidance range?

Yes, basically. But traditionally December and June, always our good quarter.

Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect.