Thank you for standing by. My name is Harry and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Incorporated SMCI US Q4 2024 Earnings Call. With us today, Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Good afternoon and thank you for attending Supermicro's call to discuss financial results for the fourth quarter, which ended June 30th, 2024. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; and David Weigand, Chief Financial Officer. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at ir.supermicro.com. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive, industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to those public filings, including our most recent Annual Report on Form 10-K. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Supermicro Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Supermicro. Our first quarter fiscal 2025 quiet period begins at the close of business, Friday, September 13th, 2024. And with that, I will turn it over to Charles.

Thank you, Michael. Today, I am pleased to announce another record quarterly result of $5.31 billion, a 143% year-over-year growth. For fiscal 2024, we have achieved $14.94 billion in revenue, a 110% year-over-year growth rate. To put this in perspective, our Q4 revenue has exceeded the full year revenue of fiscal 2022. Our robust growth is driven by our technology and product leadership in the AI infrastructure market, especially with Generative AI training and inferencing. We have been scaling quickly to secure a large share of AI CSP opportunities, deploying some of the largest AI SuperClusters in the world. Leveraging our system building blocks, we build and optimize rack-scale plug and play solutions with the latest DLC liquid cooling technology, helping our customers achieve the best TTD time-to-deployment and TTO time-to-online and lowest TCO with their AI solutions. Here are some key quarterly highlights. First, Supermicro is pleased to be included in the NASDAQ 100 Index last quarter. Fiscal Q4 net revenue totaled $5.31 billion, up 143% year-on-year with a strong record high backlog. We could ship more if not for DLC liquid cooling component shortage. Fiscal Q4 non-GAAP earnings of $6.25 per share were well above $3.51 last year, which was 78% year-on-year growth. Our Q4 operating margin is 7.8%, which is lower than what we expected due to the higher mix of hyperscale datacenter business and expedited costs of our DLC liquid cooling components in June and September quarters. Some key new components shortage delayed about $800 million of revenue shipments to July, which lowered our EPS for June and will be recognized in our September quarter. The availability of our Malaysia facility later this calendar year and our dominating position in DLC liquid cooling total solutions will be instrumental in increasing our profitability. Supermicro is powering the…

Thank you, Charles. We had robust growth in the fiscal year, and I am pleased with the progress we made on our strategic initiatives. For fiscal year '24, we reported revenues of $14.9 billion, representing 110% growth over fiscal year '23 revenues of $7.1 billion. Fiscal year '24 non-GAAP diluted EPS of $22.09 grew 87% over fiscal year '23 non-GAAP diluted EPS of $11.81. Between fiscal year '21 and fiscal year '24, we achieved significant operating leverage with revenues growing at a compound annual growth rate of 61% per year while non-GAAP operating expenses only grew at 19% per year. Between fiscal year '21 and fiscal year '24, gross margins have met or exceeded the target range of 14% to 17%. Non-GAAP operating margins were above the target range of 5% to 8% between fiscal year '21 and fiscal year '24 and more than doubled from 4.4% in fiscal year '21 to 10% in fiscal year '24 due to strong revenue growth and operating leverage. Q4 revenues were $5.31 billion, up 143% year-over-year and up 38% quarter-over-quarter, and above the midpoint of guidance of $5.1 billion to $5.5 billion. Growth was driven by strong demand for next generation air-cooled and direct liquid-cooled rack-scale AI GPU platforms, representing over 70% of revenues across enterprise and cloud service provider markets where demand remains strong. We exited the year with an acceleration in innovative DLC products, a large design win pipeline and a strong backlog, positioning us for continued growth in fiscal year 2025. We expect gross and operating margins to gradually increase in the year driven by product and customer mix, manufacturing efficiencies for new DLC AI GPU clusters and new platform introductions. As Charles discussed, shipments may continue to be constrained in the short-term by supply chain bottlenecks for key new…

Harry?

Thank you. [Operator Instructions] Our first question today is from the line of Michael Ng of Goldman Sachs. Please go ahead. Your line is now open.

Hey, good afternoon. Thank you very much for the question. I guess, I have, two. Encouraged to see the revenue guidance for $26 billion to $30 billion for fiscal '25. I was wondering if you could just provide a little bit of color around the assumptions underpinning that revenue guidance and any visibility that you have in terms of backlog and some of the contingencies you might be assuming in terms of supply availability? And then secondly, I was just wondering if you could provide a little bit more color around the growth in operating margin, improvement throughout the year. Should we think about the, the long-term gross margin targets as applicable for the full year as well or exiting the year? Thank you.

Okay. Thank you. I mean as to what we share, I mean, we continue to gain design wins and we see lots of new product available, including DLC liquid cooling and Datacenter Building Block Solutions, we see a lot of customer engagement and also more new customer like to engage with us. So with our capacity continue to grow $26 billion to $30 billion. That's our target for the next 12 months. And as to gross margin, as what we just mentioned, our DLC liquid cooling now have been very mature. So we are able to take advantage from that and also Datacenter Building Block Solutions that provides a much better value, improve customers' Datacenter time to online and also EG customers job to build their data center. So all of those will increase our profitability gradually.

Thank you, Charles.

Thank you.

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

Yes. Hi. Thanks for taking my questions. I have a couple as well. Maybe if I can start with the gross margin performance in the quarter. I know you mentioned you had a hyperscale customer, which impacted product customer mix and margin impact there. How should we think about sustainability or sort of repeat orders from that customer? It sounds like you're saying that's part of the improvement and you probably don't see as much repeat, but just wanted to confirm if that's how we should be thinking about the hyperscale customer you had, which is that it doesn't really repeat through fiscal '25. And I have a follow-up.

Yes. We have been very consistent. I mean before we are Silicon Valley based, operations was in Silicon Valley. So we focus on enterprise, high-quality, higher performance customer only, that's before. But when we start to take production operation advantage from Taiwan, we start to grow large-scale datacenter customer. And now we have a huge capacity in Malaysia, it will be ready by later this year. So with the economic large-scale advantage, we are waiting for a large customer. So we will continue to grow with large customers. At the same time, we also continue to enhance our enterprise customer base. So recently, we also see the growth in some demand from our enterprise with our software total solution, I mean Datacenter Building Block Solutions. We start to gain more attraction for the datacenter, I mean, enterprise customers as well. So we believe long-term economic scale, the enterprise customer base and overall Taiwan and Malaysia advantage cost advantage that we have a way to grow gross margin and net profit.

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

Yes. I mean, yes, we heard NVIDIA may have some delay, right? And we treat that as a normal possibility. When they introduced new technology, new product, they are always have a chance to -- there will be a push out a little bit. In this case, it pushed out a little bit. But to us, I believe we have no problem to provide the customer with a new solution like H200 liquid cooling. We have a lot of customers like that. So although we hope better deploy in the schedule, that's good for a technology company, but this push out overall impact to us. It should be not too much.

Okay. Thank you. Thanks for taking my question.

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

Hi. Thanks for taking my questions. I have two of them. The first one relates to the gross margin performance in the quarter. David, can you specify of the 430 bps sequential decline, how much was the result of the customer mix, which is the higher hyperscale customer mix versus the impact of ramping liquid cooling solutions? And how much was that impact to gross margins? And in terms of, I think, Charles, you said you lost about $800 million of revenue in the quarter because of nonavailability of components. Is that all liquid cooling related or was that related to other things like GPUs as well? Thank you.

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

Ruplu, it wasn't a loss. It was pushed out into the next quarter. Yes. So there was -- we really -- we were surprised by the amount of demand that we had in this market. And so we -- our manufacturing efficiency improves -- has been improving every day. And so we expect that to continue and that's going to help our gross margins going forward as we deploy liquid cooled racks at scale.

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

Basically, we support a handful customer for liquid cooling. And most of them, once they try our liquid cooling, they will continue to deploy higher percentage with liquid cooling because the cost -- the hardware acquisition cost is about the same, but they will save a lot of energy costs. So I believe this growth will be consistently growing.

Thank you.

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

Yes. Good afternoon, guys. Thanks for taking the question. Charles, you said a lot of good stuff on this call. So I'll try to just ask about one or two things here. I guess to start, could you frame for us how the company is thinking about its liquid cooling capability relative to others who are providing liquid cooling service as well. That's been a big top of the conversation. It sounds like you guys are really high on your capability and it seems to be showing up at least in the guidance. But I think additional context around how you guys are competitively positioned and maybe some of the technical reasons why would be super useful for those. And then I just have a quick follow-up.

Yes. Thank you. I mean as you know liquid cooling have been in the market for 30 years and market share compared with overall datacenter size always small, less than 1% or close to 1%, I would have to say. But just June and July two months alone, we shipped more than 1,000 racks to the market. And if you calculate 1,000 racks, AI rack is about more than 15% on a global datacenter new deployment. So we are very happy. We are happy that the industry pushed from air cooled to liquid cooling and to help customer save energy costs and reduce carbon footprint. At the same time, because of the liquid cooling, DLC liquid cooling datacenters require 30% to 40% less power, that's why it's met customers' datacenter availability quicker because the customers don't have to wait for higher power budget from a powering company. So overall we see more customers like our liquid cooling solution.

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

I believe for June and July in last next two months we may ship at least 70% to 80% or liquid cooling compared with all the liquid cooling in the world. So for liquid cooling, we have at least 70% to 80% market share.

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

It's a very good question. I mean, last month, we have about 1,000 racks per month liquid cooling capacity. And today, we already grow another 50%. So now we have a 1,500 rack per month capacity. By this year-end, we will grow that to 3,000 rack per month. That's with liquid cooling alone. So we really believe liquid cooling is a much better choice for the market and we provide kind of consultation to customers. And most of the customer when discuss with our engineering team, they love liquid cooling. And again, we are growing customer base for liquid cooling very strongly. And we're really happy for that because minimized power consumption have been common value to the world and especially save operation costs.

And that's fiscal year fiscal year you say end of the year and the fiscal year?

For the next 12 months, I believe, liquid coding will be a big portion of our business.

Thank you.

Thank you.

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

Yes. Thanks for taking the question. I've got two as well. I guess I want to go back to the earlier question on Blackwell just because I think it's going to be a key focal point for a lot of investors here especially as we kind of shape the full year guidance. So Charles I want to be clear. So has your guidance contemplated as we think about the December quarter, do you believe that you'll be shipping the Blackwell platform solutions for revenue in the December quarter or should we think about the full year guide is a bit more weighted to the back half of the fiscal year given some of these concerns around the timing of Blackwell availability and NVL36 and NVL72 platforms, et cetera. I'm just curious of how you want us to say for the street to think about the cadence of that full year guidance shaping up on a quarterly basis. Appreciate you're not going to give quarter-by-quarter guidance.

Yes. Thank you. I mean, indeed, we are relatively very conservative. I understand Blackwell may postpone how much we don't exactly know because the new technology always what can be pushed out, right? So for Q3, for sure, we do not expect any Blackwell volume. For Q4, I mean December quarter, I guess, it will be very small. Engineering sample small volume. So the real volume, I believe, had to be March quarter next year. And that's why we foresee only $26 billion to $30 billion.

Yes. That's very helpful. And then as a quick follow-up, I want to go back to kind of the gross margin discussion too. We talked about the impact of the DLC platforms. You talked about product mix. One of the other comments, David, you had made was that winning strategic new customers was a factor in that 430 basis point gross margin degradation. Can you help us appreciate what exactly the impact of that has been? How that might have changed this last quarter? And then I'll flip my final one in. Any disclosure on purchase obligations coming out of this last quarter? Thank you.

Yes. Thanks. I'll answer those in reverse order. We don't have any announcements in terms of purchase obligations and so we'll point you to the 10-K for that. But with respect to your first question, I would say, we prepared the market for a downturn in margins or a softening of margins in our guidance last quarter. But even we were surprised by the acceleration that we saw in the liquid cooled rack market. And so we had to ramp up our supply chain. We paid a lot of expedite costs and higher supply chain costs. So I think as the supply chain improves, we expect those efficiencies to now come back out, but that impacted us more than we had expected.

Especially for June quarter.

Yes, for the June quarter.

Is that the majority of the -- was that the majority for the 430 basis point decline?

Well, no, I think. No, so half was targeting specific accounts like we announced last quarter. And the other half was really the higher supply costs that we encountered.

Yes. Very helpful. Thank you, guys.

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

Hey, guys. Thanks for taking my question. I have two parts. Firstly, can you give more color just in terms of share gains, especially within the hyperscale arena? Traditionally, Supermicro has been more Tier 2, Tier 3 enterprise. And you guys talked about higher mix on hyperscale. Just curious does that mean you guys are winning new penetration to the hyperscale space?

Yes. Again like what I just mentioned with our Taiwan capacity is getting bigger and Malaysia capacity will be ready. So we're fully ready for large scale datacenter customer, but we will be selective. So that's why we foresee only $26 billion to $30 billion. If we try to be more aggressive in a large scale, our growth can be even faster than that. But we try to grow in both ways enterprise and large scale datacenter kind of try to balance so to maintain our healthy profitability.

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

Liquid cooling, I mean, for sure, is necessary and it's very helpful for Blackwell solution. Although Blackwell solution pushed out a little bit. But indeed we enable liquid cooling for H100 and H200 as well and a lot of customers are interested in our H100 and H200 liquid cooling now indeed. So liquid cooling to from our position we'd like to support the whole datacenter not just Backwell.

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

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

Okay. Great. I will go back to the queue. Thank you.

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

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

Yes, I mean, indeed, the liquid cooling from our point of view it is really a good value to the whole market and our whole planet because of less energy consumption, right? So we enable liquid cooling primarily for Blackwell, right, because Blackwell higher power that's for sure. Lots of cases need liquid cooling. But we enable that for H100, H200 and regular CPU as well. Because overall liquid cooling once mature, once economical scale is good enough, it's good for all different kind of computing. And not exactly now, we are deploying, we are promoting. Lot of our customer continue to interest in our liquid cooling even enough for Blackwell.

Got it. Thank you. And then you mentioned getting back to the gross margin target range by the fiscal year-end. Can you help us narrow down a little bit more where in that target range you expect to be at the low end? Is it more towards the middle kind of help us understand how you're getting there?

Okay. For June, it's really a unique quarter because we deploy lots of liquid cooling and we pay lots of exploration cost. So that makes our June gross margin much worse. But now, indeed, our liquid cooling technology have been getting very mature, and we have a high volume now. So that though our liquid cooling cost are now. And however we try to promote liquid cooling as a mainstream product solution. So we try not to add the value too much to customers. But, instead, we try to gain market share and make liquid cooling everywhere.

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

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

Especially with our commissioned Datacenter Building Block Solutions with more software, on-site deployment, maintenance and kind of end-to-end management service. So our profit margin should grow from a Building Block Solution for Datacenter very soon.

Great. Thank you, guys.

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

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

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

But the $20 million is that interest income. The $20 million is that interest income?

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

Okay. All right. And then a question I have for Charles. Obviously, you've done a good job of doubling revenue in fiscal year '24. But you also had a negative free cash flow of $2.6 billion. And if I were to look at the high end of your revenue guide for fiscal year '25, you're on track to double revenues again. Does that mean that you're going to need to burn another $2.5 billion to $2.6 billion of free cash flow to hit those revenue targets?

Not necessarily. I mean if we try to be very aggressively growing market share maybe if example we forecast on $30-something billion, right, so in that case, we may need more. But if we try to focus on below $30 billion then not necessary.

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

Got you. Thank you. What should I assume for fiscal year '25 CapEx?

No. We don't have -- we're not giving a guide at this time.

Okay. But would it be down on a year-over-year basis since most of the expansion in Malaysia and US are behind us?

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

Got you. All right. Thank you, Dave.

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

Yes. Thank you. I want to talk about DLC and some of the chatter that's been out there from some competitors and that, it sounds like failure rates for DLC, broadly speaking, not necessarily for Super Micro is high relative to air-cooled. Can you comment on what is Super Micro's DLC failure rates relative to air-cooled and then also relative to other DLC solutions. And I guess maybe we can do it on a per-node basis annualized failure rates or whatever basis you want to utilize?

Yes. We spent a lot of effort in last, I would like to say, two years to prepare our optimized DLC solution, including lots of new design, redesign, refining the components of the system. So finally, I mean, about May this year, right, we have our DLC solution for you ready. And we have more than a handful, high-profile customers who really like our DLC solution. That's why we're deploying the solution to them and that's why we paid lot of exploration charge, right? But now the good thing is our whole DLC solution has been very mature and ready for really high-volume production. So now for any customer want DLC, we are able to support them quickly and with a much reasonable cost now. So looking forward, I mean, DLC, I believe, will be a really popular solution for the world because it's more efficient, especially energy saving. So we are very happy that we establish DLC solution much ahead of anyone else. Again like June and July, I believe, we have at least 70% or 80% maybe even higher market share in the world for DLC. And air-cooled, again, we have been -- have a very optimized air-cooled solution. So we continue to promote air-cooled solution for sure.

And do you have any thoughts on the actual like failure rates relative to air-cooled and then relative to other suppliers DLC solutions?

Yes, liquid cooling, as you know, because a very high efficient in cooling, right? So they allow CPU, GPU other components running at a lower temperature. And then in lot of case, indeed, are able to optimize customers' datacenter performance by percentage, right, a couple of percentage to even high single-digit percentage. So a lot of customers really like DLC at this moment.

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

CPU, GPU and other components at a lower temperature that which you have the kind of the whole datacenter quality, uptime, availability time.

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

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

Okay. Thank you.

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

Hi, guys. Thanks for taking my questions. I have a few here. David, could you comment on the mix shift -- mix rather of AI rack scale revenue here in the quarter? Was it -- did it increase quarter-on-quarter in the June quarter?

Absolutely. I mean our revenues went up -- over a $1.5 billion and that was primarily driven by liquid cooled racks.

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

Yes. Customers like our high density computing solution especially per rack. That's why you say 64 GPU or more GPU, right? So we are very efficiently provide the customer for whatever configuration they like. And very soon we will allow something even better for sure.

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

We are building that capacity for that because how many customers will move to DLC, especially when Blackwell ready. So we are very optimistic for that, especially after Blackwell in high volume production. And we have many Blackwell ready optimized system and rack scale design.

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

That's clear. Okay.

Thank you. And we have run out of time for any further questions. So this will conclude the Super Micro Computer Incorporated Q4 2024 Earnings Call. Thank you to everyone who is able to join us today. You may now disconnect your lines.