Good afternoon. My name is Abbey and I will be your conference operator today. At this time I would like to welcome everyone to the Super Micro Computer Incorporated Fiscal Quarter One 2023 Results Conference Call. [Operator Instructions] Thank you. Mr. Michael Staiger, you may begin your conference.

Good afternoon and thank you for attending Supermicro's call to discuss financial results for the first quarter, which ended September 30, 2022. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer, 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 in the Investor Relations 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 guidance for the second quarter of fiscal year 2023 and the full fiscal year. There are a number of risk factors that could cause Supermicro'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 2022, and our SEC filings. All these documents are available on the Investor Relations page of Supermicro'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.

Thank you, Michael, and good afternoon, everyone. Today, I am very pleased to announce another fast growing quarter and a great start to our fiscal 2023. Supermicro is finally ready to do a big jump, for Green Computing and for being the best IT Total Solution company. Here are some key highlights for the quarter. First, revenue for the first quarter of fiscal year 2023 totaled $1.85 billion, up 79% year-on-year; above our guidance range of $1.52 billion to $1.62 billion, with growth rate at about 10 times greater than the overall IT industry. Our fiscal first quarter non-GAAP earnings per share grew over 490% year-over-year at $3.42 compared to $0.58 a year ago. It was well above the high end of our guidance range of $2.07 to $2.32. It was achieved by our leading designs, innovative products, our IT Total Solution, and our strong global operations. Especially, the growing utilization of our Taiwan facility is improving our ability to meet demand and making higher operating margin. Our plug-and-play Rack-Scale Total IT solutions and GPU-based systems have resulted in triple-digit percentage growth year-over-year. Along with excellent results from storage and 5G verticals, we are making solid market share gains. Growth in our major geographies skewed to the U.S. at 70% of total sales this quarter, driven by ongoing design wins from some of the top tier technology leaders. They recognize and accept the strong value proposition of our Green Computing technology and Total IT Solutions. We are off to a great start for fiscal 2023, and we expect our unprecedented growth momentum to continue. We are comfortably delivering quarterly revenue in the multibillion-dollar range, supporting our ambition of reaching $20 billion in the near distant future with a focus on increasing our profitability. Based on our current demand and capacity,…

Thank you, Charles. I'm pleased to report Q1 fiscal 2023 revenues of $1.85 billion, a 79% year-on-year and 13% quarter-on-quarter increase. Revenues exceeded our initial guidance range of $1.52 billion to $1.62 billion and our recently updated range of $1.78 billion to $1.82 billion. Our growth momentum continued with our rack-scale Total IT Solutions targeting growing markets and customers with accelerated GPU/AI workloads, software-defined storage and networking, public and hybrid cloud, and 5G/Edge/IoT Platforms. Our Green Computing Solutions helped us gain market share as customers valued both generating less carbon in our environment and reducing their operating costs. These growth drivers have resulted in accelerated revenues with expanding margins and operating leverage. In fiscal Q1, Super Micro again recorded strong revenues across all three of our market verticals demonstrating the value we bring to our end markets and customers. We achieved $840 million in our Enterprise and Channel vertical, representing 45% of Q1 revenues versus 51% last quarter, that vertical was up 16% year-over-year and 1% quarter-over-quarter. The year-over-year growth in this segment was driven by our new product offerings. Our OEM appliance and large datacenter segment achieved $921 million in revenues, representing 50% of Q1 revenues versus 44% last quarter. This vertical was up 268% year-over-year and up 28% quarter-over-quarter with strong growth coming from design wins from datacenter and OEM appliance customers. Our 5G/Telco/Edge/IoT Segment achieved $90 million in revenues representing 5% of Q1 revenues, which was the same as last quarter. This was also – this vertical was also up 58% year-over-year and 9% quarter-over-quarter. Our mix of complete systems and rack-scale Total IT Solutions has been increasing steadily. Systems comprised 92% of total revenues and was up 102% year-over-year and 16% quarter-over-quarter as we saw growing success with our high-value rack-scale Total IT Solutions for emerging…

Operator?

[Operator Instructions] Your first question comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Hi, good afternoon everyone. Thank you for taking my questions and congratulations on a really, really impressive quarter. My first question is just looking at the guidance and I know you raised this, but the midpoint still suggests you're anticipating declining quarters on average for the rest of the year. Is that express function of – an expectation of perhaps with a recession or macroeconomic pressure on your clients? Or are you thinking of specific customer programs there at the midpoint or is something else? I know in the past, you've put in a cushion there for what has been supply chain constraint. Just help us understand what you're thinking within the brackets of this year going forward.

Yes, very good question as the macroeconomic condition is how to predict at this moment look like there will be some headwind for sure. But with the coming soon several rapid new technology from Intel, AMD, Genoa and NVIDIA H100, so there are lots of new opportunity for us whenever the market have a new technology, Supermicro [indiscernible] chance to gain mark share. So with that, indeed, I believe our business in next 12 months should be not too – not too much impact. And also our business automation like in the last few quarters I mentioned about our auto configurator, our online automation that will help ourselves to service customer better. And with those offset the new product, the better tool, I believe our next 12 months business won't be too bad.

Great, thank you for that. And then the second question just with the really strong cash flow you have in the quarter and an expectation for future cash generation, what are your priorities there for cash usage? I know you mentioned you still have that share repurchase program, which you didn't use. Are there any CapEx plans or should we be thinking of any other things you may want to use the cash to invest in?

So we haven't changed our CapEx allocation strategy. We still have a repurchase plan in place as market – and the board review that policy. And otherwise our CapEx for next quarter was listed as $7 million to $10 million and so we don't anticipate large increases in inventory.

And this year is, again, that's why I just mentioned so many new technologies coming. So we'd like to take this chance to continue to gain market share. So hopefully Supermicro [indiscernible] a $10 billion company and then $20 billion company. So we'll continue to focus on quickly growing the company market share and our position.

Got it. One more if I could. Did you see any weakness in the quarter from any end markets or customers or geographies?

Yes. Generally a little bit kind of signal we need to observe that, but again new product, new technology that will offset this macro economy weakness.

Okay, great. Thank you very much guys.

Thank you.

Your next question comes from the line of Nehal Choski from Northland Capital Markets. Your line is open.

Yes, thank you, amazing quarter, really impressive guidance shows strong visibility here. And I'm sorry I missed quite a bit of a conference call, so you probably already hit upon this, but what are you seeing on the supply chain side at this point?

Supply chain has been dramatically improved, as you may know, right. Three months ago, they have seen a shortage everywhere, but as of today, the shortage problem has been dramatically improved, so not much shortage at this moment. And we believe looking for growth in the coming quarters we won't have a shortage problem. After this, that won't be too bad and that's why we prepared to grow market share.

Okay, great. At what point in time does you actually see the supply chain shortage more or less evaporate?

Indeed since quickly improved in about last two months.

Okay, great. And then really incredible free cash flow generation, I haven't run through numbers yet to figure out how that was done given the strong growth. Can you just walk me through what was the driver of the strong free cash flow generation?

Sure, absolutely. You can see our cash conversion cycle came down and that was a result of, we were able to speed collections and also we did receive some advance customer payments and we'll have a little bit more color on that in our 10-Q, which should be filed in the next few days. But we received about $70 million in advance payments from customers, so that helped us out. But still our cash flow from operations greatly exceeded our net income.

Yes. In that one month or three months, I mean we have some cash pressure, major because global shortage, so we had to keep large amount of inventory, now inventory program have been improved because no more big supply chain challenge now.

Got it. Understood. Okay. And then Dave, did I hear you correctly that you expect free cash generation to be close to that non-GAAP net income for fiscal 2023?

Yes. Nehal, that's correct, because we have our – inventories are a little more reasonable now. And then what I mean by that is the supply – some of the supply chain issues we have our cash flows are a little more imbalanced and so we expect cash flows to be a little more in line with income.

Great. And then finally your updated low end of guidance implies and I think if we look at your prior low end of guidance implied that maybe you'd have a slightly negative year-over-year growth in the back half fiscal year 2023. Now this new updated guidance implies 10% to 15% revenue growth. So again, I'm sure you would stress this during the script, but what is driver of this improving growth outlook despite worsening macro that you're providing here at the low end of guidance by the way?

Again, the major reason is a macroeconomic condition. Because no one really know how long the economic headwind will last. So we try to be more conscious.

Yes, understood. I guess my point is that the updated low end actually implies an improved year-over-year growth outlook on the back half of the year. This is despite a worsening macro. So what are you guys seeing that's effectively driving a raise in your back half revenue growth expectations?

Yes, we really have – we have growth in all of our verticals, Nehal, and not only that but geographically as well. So as Charles mentioned, there's new CPUs coming out from AMD, from NVIDIA, from Intel, as well as relative new product launches. So we think that all of those, the momentum that we have in our verticals as well as the new product introductions is what gives us guidance to the numbers that we put up.

Excellent. Fantastic job. Thank you for taking my questions.

[Operator Instructions] Your next question comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Hi, thanks for taking my follow up. I was wondering if you were seeing any kind of impacts on the sanctions on China by the U.S. if there are any. I know earlier in the quarter, there's NVIDIA news; I know a lot of companies got added to the entry list where any of those are customers. How should we think about the consequences of those actions?

Yes, we see some impact for sure and exactly how long that impact we are lasting, we still keeping watch.

Yes. So by the way, we didn’t have any customers that were added, however, as everyone knows the GPU sales became limited. China sales last quarter were less than 3%. So we don’t consider this to be a significant issue for us going forward.

Understood. Thank you. And then in your guidance, do you have any impact from foreign exchange built in there or possibly price declines as maybe you’ve passed through declines in component costs as they occur.

Most of our contracts are invoices are U.S. dollar denominated. We – our FX really comes from the fact that we have some Taiwan dollar denominated loans, and that’s what causes the quarterly fluctuation in our FX is just marking the dollar to – the U.S. dollar to the Taiwan dollar. So therefore, the only impacts on FX come from really a price setting issues as opposed to balance sheet issues.

Got it. Okay. And then lastly the strength in the quarter, did you observe any pulling or was it just more of the supply chain loosening up and being able to get more components and were there any push outs that you observed?

So we didn’t have any push outs. We had some customers, this will be in the 10-Q we had a couple customers who prepaid and whose shipments somewhat, which were made but were not – did not qualify for revenue recognition, others that would ship later. So that we didn’t have any push out, so.

Okay. Great. Thanks, again.

Your next question comes from the line of Mehdi Hosseini from SIGS. Your line is open.

Yes. Thanks for taking my question. A couple of follow-ups. Thanks for the update on the fiscal year and I just want to better understand how your system ASP would trend given the updated fiscal year 2023 revenue guides. I’m asking because you have done a really good job in increasing content, it’s captured in your system ASP, and I want to see if you would still be able to increase to see a system ASP increasing in double-digit figure. And I have a follow-up.

So Mehdi, probably may have heard that a lot of GPU prices and CPU prices are going up, especially with the new the new refreshes that are coming out. So we anticipate that ASPs will continue to go up.

Okay. Would – for your fiscal 2022, it was more than 30%, should we assume the acceleration or would you be able to keep up the pace?

It’s a big question. I mean again, they are lots of new technology, new CPU, new GPU, so that will be a positive side, but at the same time, the macro economy can be – can put in some negative impact. So at this moment, we try to play safe, so that’s why the number I will share is relatively conservative.

Okay. So that’s good. A balance sheet question. And David, there was a line item. I think accounts payable also helped combine the $75 million of the prepayment. It helped with a positive cash flow operation. And in that context, how should I think about cash from operation in Q2 fiscal year 2023?

Yes. So I think that I think my general comments apply that our – we see our cash flows as now more balanced with income – with net income. And so we’ll get a – we’ll have a few puts and takes where customers prepay more or less from quarter-to-quarter. But we went – we underwent a lot of heavy lifting Mehdi to get our revenue levels up and our AR levels up as we were growing. And so to the extent that we have more growth, we will face those challenges, but based on our current forecasts, we expect cash flows to be close to net income.

And then updated guide for CapEx in FY2023.

So we haven’t given a guide for FY2023 just for the next quarter.

Should I assume similar capital intensity as last year, just for modeling cash flows?

I think we’ll come out with a little – with more of a guide later on.

Got you. Thank you.

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

Hey, good afternoon, guys. Congrats on the ongoing momentum and thanks for taking the question. I have a few falls tonight, so I may ask something that’s already been addressed. If it is, we can just chat on it offline. But I would love just context on customer penetration, any new customer acquisition that was contributed to the quarter. And then any context you can give on what continues to be really, really good ongoing strength of those key application types that have been driving the business for the last number of quarters. Anything that you haven’t given yet, I can take it offline with you or get out the transcript. Anything that I missed if you’ve already talked about it, but there’s any additional context, we love to get it. Thanks.

Yes, very good question. As I earlier just mentioned, we just introduced a couple of business automation tool, including auto configurator, including auto online, online service. So all of those were ahead of our sales, make our sales and customer relationship become more efficient, more accurate and we expect we are able to gain more customer, hopefully many more customer because of the improvement of our automation tool.

And Charles…

Again, with our much stronger storage product now, right, including all kind of data center management tool, our security tool and other service and applications. So yes, so we are in much stronger position from this point of view with our kind of large-scale total solution.

And let me ask a follow-up too. And this may – this is something that could have come up earlier as well on the call in your pay remarks or in the Q&A. Sort of upcoming Intel AMD and Nvidia cycles, should we think of those as being potentially meaningfully incremental to your business run rate or those sort of blended in? But they sort of just like blend into the run rate? Thanks.

For sure, customer will buy new product to replace that old product, right? But because we always have a stronger new product line, a new technology, that’s how we expect we will continue to gain customer base and also improve customer relationship because of a stronger product. And not just the hardware product like before, but now our total solution have customer a lot. And GreenComputing as you know, our GreenComputing is a total solution. And we make for example, water cooling much easier and much quicker delivery time. So all of those we believe will be a positive drive for our business growth.

That’s super helpful. Thanks a lot guys. Thanks, Charles.

Thank you.

Thanks.

[Operator Instructions] There are no further questions at this time. Mr. Charles Liang, I turn the call back over to you.

Thank you. Thank you for joining us today and expect to meet you next quarter. Thank you.

This concludes today’s conference call. You may now disconnect.