Q1 2022 Super Micro Computer Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Supermicro first quarter fiscal 2022 earnings call. At this time, all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad to remake yourself from the queue simply press star one again.
At this time I would like to turn the conference over to Nicole <unk> Investor Relations for Supermicro. Please go ahead.
Good afternoon, and thank you for attending Supermicro call to discuss financial results for the first quarter, which ended September 32021 by now you should have received a copy of the news release from the company.
You did at the close of the regular trading and is available on the company's website.
As a reminder, during today's call. The company may refer to presentation. That's available to participants in the IR section of the company's website under events and presentations tab. We've also published management's scripted commentary on our website. Please note some of the information you'll hear during our discussion today will consist of four.
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 the fiscal year 2020, Q4 fiscal year 2022.
The potential impact of COVID-19 on the company's business results of operations.
There are a number of risk factors that could cause super micro's future results to differ materially from our expectations.
And 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 Investor Relations page of Super Micros 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 company presentation onto our press release published earlier today.
A reconciliation of GAAP to non-GAAP results is contained in today's press release and the supplemental information attached in today's presentation.
At the end of today's prepared remarks, we will have a Q&A session for sell side or ask questions with that I'll now turn the call over to Charles Liang founder Chairman and Chief Executive Officer Charles.
Thank you Nicole and good afternoon, everyone I'm pleased to I'll answer that our quarterly revenue you can see that $1 billion, even during the traditionally weak September quarter.
For fiscal Q1.
2020 tool, we deliver strong year over year.
Maybe it grows.
35%.
We continue to gain much shell and exciting well again and executing well against our plan to achieve $10 billion annual revenue.
Revenue growth was driven by strong <unk>.
<unk> across many key customers with our total IP solutions strategy.
Now, let's look ahead.
Highlights from the quarter.
Our forces.
Quarter net revenue totaled one point in ulcerative Bds.
<unk>.
Consecution quarter of $1 billion in revenue up 35% year over year and tons, 3% quarter on quarter exceeding our guidance of.
$900 million of nine AAP anemia.
Efforts continue to enable our growth trajectory.
Multiple times.
Average industry growth rate.
Well physical fiscal quarter non-GAAP earnings per share plus PPA has been payout to.
55, <unk> in that setting.
PDL, one year ago, and the higher than our guidance of 28 to <unk>.
All of our major geography continue contribute significant year over year growth wished to that APAC region, including Japan poverty.
Year over year.
Newly completed Taiwan expansion at Bob.
Great are you, helping our Asia and EMEA growth momentum by providing additional capacity and nobody's operation coast.
These results show that.
We remain on track to achieve our $10 billion revenue target how should we <unk> shell.
Starting with <unk>.
<unk> basically I see some BD and broke solution.
The 28 years ago, how would the many years of <unk>.
Have you seen the system integrators.
<unk> value added resellers, we've begun to offer application optimize the company the systems.
<unk> partners, including minute appliance partners.
And large enterprise that come in.
The past 10 years, we had continue to expand and begin our business transition.
On the hardware solution company, who had total IP solution company that combined hardware software globally.
And more features.
This application optimize total IV solutions or.
Men, who bought the coal markets and.
A much broader technology, who print today, we are redefining our growth drivers.
Our growth strategies.
Post subsystem and component we will continue to offer several manageable encourage yours payable and accessories. So will the market will continue growing our market share.
Okay.
Computer systems.
We will continue to follow these folks and expand on growing our company the Halloween system.
Technologies co developed with our key partner, including entail AMD, Nvidia Broadcom and others.
And third.
Total IP solutions.
Accelerating our broad development of appliance and patent play in rack scale solutions for AI machine learning.
Industrial automation Iot.
<unk> telco and cloud products.
And number four.
Yeah.
We are finally ready to aggressively promote our software service and <unk> <unk> nine.
And I wish you more about the other two is when they are ready.
Our premium products and previous systems business have been stable to growing over the kids and they serve.
P backbone of our revenue grows with small enterprise customers and.
Appliance partners engagement <unk>.
<unk> scale.
I'd solutions business is our new manager focus now.
To make our total IP solutions, a seamless experience for our customers.
We have been increasing our R&D.
Reach those two folks on many total way of Botox.
Service and networking.
For many years.
This put us.
Has the higher value parts of our total IP solutions.
We have be that key to improve our margins and profitability in the coming quarters and years.
Our new online auto Congress, Raytheon together with our new B to B program, and now driving our business grows more efficiently than ever before.
Our innovative new commenced enter phase.
Customer service system have been greatly helping our sales.
PM as well as our key customers.
They actually I meant take really improving our business interactions with customers.
Much faster much X rays.
All optimized.
More customer friendly while reducing them.
Empower human BD and <unk>.
Our new intelligent database <unk> to us in Cid, performing much smarter and faster than human Apus.
In most areas.
This automatic intelligent system is.
As a service in our sales force and customer.
So they are great satisfaction now.
And there will be constantly upgrade and update.
Our push for war total Ip's dilution.
Benefiting supermicro and our customers in multiple ways.
Most importantly, our customers will receive higher quality products, they are thoroughly optimize integration and validate it in house.
Pnp, rather than pay scale products, our customers need to connect network and power cable and then ready to run the application.
So I think they'll be putting them in time for many weeks.
Just a few hours.
So total IP solution is also happening supermicro, and our customers to mitigate the impact globally shortage.
Supply chain disruptions.
Accurately forecasting.
Inventory is scale.
And how that ties in with our strategic partners.
The system feeling focused solution allows us to utilize.
Common subsystems.
<unk> components.
<unk> design and deliver puts commodity products.
Reduced manufacturing and supply chain complexity and risk.
These whales dramatically improve our customers' time to market, which is pretty close to their success.
The total IV solution is in seed.
We win competition or supermicro, our customers and our supply chain partners.
Customers can get a piece of our total IV solutions now.
By signing up for.
<unk>.
Niels.
Jumbo program.
The motor Iran. They are software and applications on our customer.
Reconfigure pretty embedded data correct.
Powered by the latest technology from Intel AMD and Nvidia.
We also provide.
Providing a hosted in the instance of plug and play call.
It was quite sure.
Operating system and other tools that can be accessed remotely or development and testing.
The program will is steel more come with its in supermicro customers.
That delivers the convenience faster time to market performance optimization.
The savings.
The security team.
In summary.
Michael is rapidly growing.
<unk> is transforming into a total IP solution company.
So about how the way our company.
In addition to providing the Corin is how do we our total solution, our Saudi Arabia <unk>.
And serve as a pull back.
I will now read the book and then large enterprise call.
And telco customers.
We are building and expanding our successful product and technology leadership.
Sure.
Our new growth factors, including the total IV solutions and faster growing Fi.
A key to achieve our $10 billion revenue target.
Higher profitability.
And third.
The predicating, our mantra shell success in the U S.
<unk>, an email with the completion of our new apex campus in Taiwan.
And for Us.
Our new commenced enter pace, although Congress Raytheon MPTP automation platforms are getting borrowed that are used by customer.
Rhonda will now and they are extra rate in our market share.
Customer satisfaction.
Encouraging.
Yet I'm much happier with the progress of our business transformation, which is resulting in the exploration of our business.
In fiscal 'twenty to NPS.
Total IV solution company, our temp continues to increase as we invest our resources for growth.
And I am optimistic about achieving our $10 billion.
New revenue will go in the much the nonscheduled.
With that I will now pass the code for February again, Paul our CFO to provide additional detail. Thank you.
Thank you Charles.
We continue to experience diversified growth across our key market verticals exceeding $1 billion in revenue for the quarter above the high end of our guidance range. This.
This is the second consecutive quarter that revenues have exceeded $1 billion.
Revenue was growth was driven by sales to large enterprise cloud AI and telco markets continued strength across all geographies and strong demand for our products and services.
Our first fiscal quarter revenue totaled 1.03 billion, reflecting reflecting a 35% year on year increase and a 3% decrease on a quarter over quarter basis.
Looking at Supermicro is Q1 revenue in our three market verticals, we achieved $725 million in the organic enterprise and channel AI ml vertical $250 million in the OEM appliance and large data center vertical and $58 million in the <unk>.
Telco and edge Iot vertical.
Systems comprised 82% of total revenue and the volume of systems and nodes shipped were up year over year.
System node ASP.
Increased year over year and quarter on quarter.
On a year on year basis Asia increased 108% as we saw continued growth with both existing and new customers.
Europe increased 60%.
<unk> increased 13% and the rest of the world increased 6%.
On a sequential basis Asia increased 29% U S sales decreased 14% Europe decreased 3% and the rest of the world decreased 1%.
From this point forward unless otherwise noted I'll be discussing financial metrics on a non-GAAP basis.
Working down the P&L Q1, gross margin was 13, 4% down 30 basis points quarter over quarter from Q4 due to higher freight and supply chain costs. As was also reported by many other companies around the world.
On a year over year basis gross margins were down 370 basis points due to a discrete cost recovery event in Q1 of last year.
Also incurring higher freight supply chain and other costs.
In Q1 of this fiscal year 2022.
Turning to operating expenses Q1, opex on a GAAP basis increased 2% quarter on quarter, and 10% year on year to $109 million.
On a non-GAAP basis operating expenses increased 2% quarter on quarter and increased 7% year on year to $101 million.
The year on year and quarter on quarter increases on a GAAP and non-GAAP basis were driven primarily by higher personnel expenses due to increased head count, especially in Asia.
Other income and expense, including interest expense was $8 8 million dollar expense as compared to a $2 $1 million expense last quarter. The sequential change is mostly related to FX.
This quarter the tax provision was $3 $3 million on a GAAP basis, and $6 2 million on a non-GAAP basis, our non-GAAP tax rate was 16, 6% for the quarter.
Lastly, our share of income from our JV was <unk> 4 million this quarter as compared to <unk> 6 million last quarter.
Q1, non-GAAP diluted earnings per share totaled <unk> 58.
Which was higher than our mid point guidance of 38 cents due to higher revenues and lower operating expenses offset by lower gross margins.
Cash flow used in operations was $134 6 million compared to cash flow generated from operations of $63 6 million in Q4, as we built inventory ahead of our seasonally strong December quarter and positioned ourselves to mitigate the impact of supply chain disruptions.
Capex totaled $11 9 million, resulting in free cash flow consumption of $146 5 million.
Key uses of cash during the quarter included increases to inventory.
<unk> made to reduce accounts payable offset by an increase in deferred revenue.
We did not repurchase any shares in the quarter.
Our closing balance sheet cash position was $270 million, while bank debt was $279 million as we drew down on our bank lines of credit to increase inventory as we ramped production of new platforms globally.
Turning to the balance sheet and working capital metrics compared to last quarter. Our Q1 cash conversion cycle was 94 days.
Up from 80 days above our target range of 85 to 90 days due to higher inventories days.
Days of inventory was 114, representing an increase of 18 days versus the prior quarter.
Days sales outstanding was up by four days to 41 days payable outstanding was up by eight to 61 days.
Now turning to the outlook for our business.
We expect net sales in the range of $1 1 billion to $1 2 billion.
GAAP diluted net income per share of 60 to 80.
And non-GAAP diluted net income per share of <unk> 70 to 90 for the second quarter of fiscal year, 'twenty 2022, ending December 31 2021.
We expect gross margins to improve as we managed supply chain costs and maintain price discipline.
Over the upcoming quarters, we continue to 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 configure Ader BTB <unk> solutions.
GAAP operating expenses are expected to be approximately $112 million and include $7 million in stock option 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 be a net expense of a roughly $1 5 million and expect a nominal contribution from our JV.
Our non non-GAAP operating expenses are forecasted to be up quarter on quarter from continued investment in R&D and higher personnel costs.
The companys 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 5 million shares for GAAP and 55 million shares for non-GAAP.
The outlook for Q2 of fiscal year 2022, GAAP diluted net income per common share includes approximately $8 million and expected stock based compensation and other expenses net of tax effects that are excluded from non-GAAP diluted net income per common share.
We are raising our guidance for the fiscal year 2022, ending June 32022, and now expect net sales in a range of $4 2 billion.
<unk> 6 billion versus our prior forecast of $4, one to $4 5 billion.
GAAP diluted net income per share.
As expected to be at least $2 77.
Versus our prior forecast of $2 60.
And non-GAAP diluted net income per share of at least $3 20 versus our prior forecast of at least $3. The companys 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.
$54 1 million shares for GAAP, and $55 6 million shares for non-GAAP.
The outlook for fiscal year 2022, GAAP diluted net income per common share includes approximately 33 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 second quarter of 2022 to be in the range of $3 million to $5 million.
I will turn it back over to you now to call.
Operator, now you can open up the line for questions.
The floor is now open for your questions. Thank you I'd like to ask a question. During this time simply press star one on your telephone keypad again star one.
Your first question comes from Anna <unk> of loop capital.
Hi, guys, yeah listen.
Hey, good afternoon, congrats and thanks, great. Thanks for taking the question.
I guess a couple from me just just to start off could you talk about it seems like you're highlighting.
Both in the press release, and then in your remarks, new design wins.
And speaking of them.
Broadly that there across the business could you could you maybe talk to.
What you saw that raise.
Most exciting for you and most incremental.
To the business throughout the quarter and then I have a couple of follow ups. Thanks.
Yes. Thank you very good question, yes shell in the last few quarter, we start to engage.
More and more.
Large enterprise icon.
And we again.
And see the more than handful larger account in last few quarters, including <unk> telco encouraging.
AI AI machine learning and including.
HPE as well so pretty much across.
Below the range, we have a more customer and we saw low.
Pete will be auto mention <unk> auto calculator tool estimation now we are able to have sales.
Engineered NPA to communicated with Cosmo much more efficiently. So now we have a multiyear lease to talk to more customer tough tomorrow.
Customer application and multi tail, though BD will continue to gain customer and gain.
Emily.
That's helpful context, Charles Thanks.
How would you characterize I guess the.
Well I don't think I want to call it progress with the new Taiwan facility.
Could you just describe for us the appropriate.
Like the appropriate context, so that we can understand.
What the operations feels like right now both from.
From a production perspective, but also.
From a revenue generating perspective as well.
Thank you have a question, yes shell.
We see you in last few quarter.
Asian, Tim.
Tempus, our potash train capacity is very important to our business.
USAA is basically all patients have been pretty much focused on that area and that is 28 years and it is really closer to high. So we are very happy finally, we have a big <unk> in Taipei, Taiwan and now we have.
Big capacity ready and feed we could say well, yes utilize about better than 30% of our capacity. So we have a.
Cheap whole capacity available in Asia now so we are very happy and we.
Start to very aggressively engaged customer in Asia, an E mail or even leverage tayo.
Taiwan capacity to support our customer in USA.
So that's a very positive change to us.
Okay.
And how long Charles any any any estimate on what youll get.
Kind of normalized capacity utilization in the Taiwan facility.
Okay. Good.
Because of our global shortage, otherwise our revenue must be much bigger than Pope lands.
One OSV BD in this quarter.
Could you talk about it because literally shell is otherwise of that how much would be much bigger.
At this moment, our ETR is foundry in Taiwan is about 30% in <unk> and we expect one globally shows these programs do this.
We will use.
Hadn't really to.
80% to 100% capacity in Taiwan almost.
A few quarters. So we have a very strong demand and doesn't need a supply chain to be improved.
That's really helpful. Charles I appreciate it I'll get back into the queue. Thanks.
Thanks, a lot for thank you.
Okay.
Your next question comes from Manny Hasani of ESI gene.
Yes, Thanks for taking my question a couple of follow ups.
On the regarding the.
The balance sheet and cash flow can you remind me how much more.
More line of credit you have that you can.
Utilize.
So we have we have a $200 million line of credit with the bank of America, and we also have over $300 million in credit lines.
And <unk>.
Taiwan as well.
Okay. So of the total 500 that's.
I know what these being utilized right.
Yes.
As you see from our balance sheet, we're sitting at about $270 79.
Got it.
And then.
Regarding the growth.
Yes.
Can you, maybe Charles or anybody else from the team to help me understand what were the key growth drivers in Asia and Asia.
More than doubled on a year over year basis in the U S, which is the largest market.
<unk> digit growth, but Asia was up double digits.
What were the key drivers behind that growth.
Yes.
In Asia we.
Did not have.
These strong promotion before because of our capacity people less limited in Asia and those all the time, we added ship or put out from USAA customer in Asia now what our opinion is before now with Taiwan capacity.
Much much bigger.
So we are very aggressively approaching customer in Asia and not just in Asia.
As the poll European customer from Asia also very good at Benjamin and we started with <unk>.
Kind of our sales force in Asia. So so that's a major reason and we will continue to invest.
<unk> sales marketing team in Asia and EMEA.
In East Coast, Indeed in USA East Coast.
We have via BD.
Sweet spot for us as well and we just have a strong team so that proposal U S East coast now.
Perhaps maybe if I rephrase. The question you highlighted three buckets.
The revenue organic an organic enterprise OEM and the telco.
Was there any particular end market that was particularly strong in Asia.
AI for example, and telco Telco for example, and in theater, because our Asia amongst shale was a smart before so basically we have a lot of room to grow in Asia.
Got it thank you.
Thank you.
Thanks next question please.
Your next question comes from now choppy of Northland capital markets.
Yes, Thank you and fantastic results and very strong guidance great to see that.
Couple of questions for me.
Charles What's your perspective on whether the worst of the global supply chain issues have passed or not and then related to that how long do you think it will be prudent to continue carrying more inventory than typical.
Very good question and <unk>.
So you know we you added about <unk>.
<unk> $900 million inventory and now grow to almost $1 3 billion.
Meanwhile, we grow immunity.
So quickly because we went to a mix next year.
So in our space to support our customers.
To support our growth.
We continue to.
Claude the agency, but we saw our supply chain and its duty big shortage, especially in chips.
Those.
Idaho cheaper essentially somewhat chip, that's why I've mentioned before.
Some CPU shortage as well.
Gpus.
Slow delivery as well so we are facing two lots of <unk>.
Logistic a debate and.
However, because we are providing.
IP total solution now so we've taken care of aura.
Steve because he portion and chip completed positive play direct solution to our customer. So most of our customer now are very appreciated.
<unk> scale.
A total solution.
Yes, Heather continue work with our supply chain to enable those.
Shell TCE item.
How soon.
Can we fix those program, it's really a global program so.
People.
Including myself, I guess and maybe at least another three months to four months and hopefully after that <unk> will be improvement.
Great. Thank you for that perspective and then.
Pablo not embed any question regarding regional performance helpful on what's.
Driving Asia.
David and you did say that U S was down 14% Q O Q is that seasonal or is there something more going on there.
I think it's simply just a matter of digestion and we had some large very large purchases and there was some digestion of those purchases and we expect those to return.
Got it alright, I'm going to get back into queue.
Nobody else asked some good questions as well thank you.
Your next question comes from Aaron Rakers of Wells Fargo.
Yes.
Yes, thanks for taking my questions and also congrats on the quarter and the guide.
I was just kind of dovetailing off the component question everybody.
Everybody has definitely seen supply can shapes straight.
I guess my question on that is can you can you comment on what Youre seeing from a P.
Pricing perspective of some of the key components in the supply chain be it memory or other components and what youre doing to maybe pass through some of that pricing or how effective you've been there.
Yes.
As you May know Ray.
And price is dropping now.
Last month.
Maybe two months ago the theater in subprime.
Getting a much better position than before so.
So other than <unk>, indeed, most of the other components.
A big shortage.
We foresee some.
I see.
Price of oil continues to go in.
As you know even TSA Mci lungs.
Hum.
Remember forest.
Some more of their product line close to the way our increase for their customer.
So overall I feel <unk> improvement, but won't be the way that way.
And how are you reacting with your own pricing.
We basically pass through to our customer.
However, we can and customers are getting used to this model because.
We just cannot afford to carry.
So much price voice.
Pretty much I understand that.
Yes in this environment a lot of companies have seen.
Our requested maybe their own customers to provide.
Longer lead times on their own purchase commitments have you have you also ask your customers.
Lengthen out.
Their lead times, and therefore, giving you more visibility.
In the business beyond maybe just this next quarter.
Yes, basically we hope so, but probably I mean, we cannot deliver even hop back order to date.
So that's why we did not push a customer to put into the older much area.
But we hope that they can.
March and it's apparent to us about a forecast about the appeal, yes for sure.
Again.
Sure.
Putting the pecking order in fee that have been.
Big demand and we had to fulfill that as soon as possible.
And then the final question is just kind of strategically I am curious about is I think the company is fairly well positioned.
Given your engine engineering.
Our presence and breadth.
Around the role of AI and the proliferation of AI from a compute layer perspective can you help us appreciate how material.
As you know.
I'm, assuming that's <unk>.
Server platforms that are incorporating a GPU predominantly how big that business is how fast it's growing.
Kind of thoughts at a high level, how much that changes the weakness.
The mix of your business on.
AI optimized server relative to more of a traditional server.
Yes, AI Optimizes silver as you always are high value high performance high value and we really.
Very aggressive to continue outgrow, our AI machine, indeed, our AI machine, including computer system and some payable BD.
How much she is D all pretty much.
Tough tough too.
I hope <unk>.
I think you have.
<unk>.
Continued to grow very strongly because we have been focused so much from those the high end of that including.
Total solution.
Total solution, we start to ship.
End of <unk>.
AI cow to some of our partners again.
Our customers' job are much easier so when we ship direct to customer customer able to what you guys are pogy in networking cable power cable and pretty much ready to run the application. So.
Total AI call total energy solution.
I am very optimistic that our.
Deep learning AI machine.
Even including that with USD.
Dilution will continue to grow very fast.
Very helpful. Thank you guys.
Thank you.
Your next question comes from Jon Lopez of vertical group.
Okay.
Yes.
Hi, Thanks, very much can you hear me all right.
Yes, John Kent.
Great. Thanks, David.
Sorry, I had a couple of quick ones I wanted to start on the on the inventory side as well, so I apologize for doing that but.
If I remember correctly I think your purchase commitments for inventory purchase commitments as of June.
Excuse me were up 550 $575 million something in that ballpark and add double versus where they were at the end of 2020 calendar 2020.
Can you give us a feel for where that stands now as of the end of September and just given the size of those increases does that ultimately find its way onto your balance sheet or are you now it's sort of a steady state level, where what's going out is more being matched with what's coming in.
Yes, so as I think the key is we are going into a seasonally strong December quarter.
And so that combined with the fact that we've got to make sure we get it in here ahead of supply chain delays as much as possible has really driven our.
Our decision to increase inventory levels up so therefore.
In this in the current market with the delays both on the delivery side as well as on the production side.
And the delays in containers, making it too too towards <unk>.
<unk> got to order earlier. So therefore, we have to we have to place orders in order to keep up with our customer demand. So that's really and that's why we've increased our credit lines and use those to increase inventory.
Okay got you and just off the top of your head David you know where that number stood as of September.
Uh huh.
No I don't I don't released that number on the quarter.
Okay Alright, great.
Thanks for that secondly, Im sorry go ahead. Please.
We will have a little more color in the 10-K, so sure of course.
Your your deferred revenue.
Actually jumped up quite nicely.
Current deferred was up like double digits, which hasn't really been the case for the last couple of quarters why was that.
So two reasons number one we had some.
Some customers, who who prepaid and number two we had we had some additional services.
We're an.
An increase in services that we had to defer.
Yes, Okay got you.
It does mention we started folks on our Fi business historically.
<unk> Beach and service and dose.
Pulp assets have a higher profitability, but.
They are also 10 on data before revenue.
Got you that's really helpful. Thanks.
Two other quick ones. The first one is David I think you made mention to gross margin.
I think you said it was going to increase.
Wasn't sure if that meant in the December quarter or that was just sort of an intermediate term comment, but could you remind us like what are the targets again and B just put some color around that comment and how we should think about maybe trending in trajectory.
Sure absolutely. So our target model gross margin is of course, 14% to 17, and we've mentioned that.
Again this quarter or.
Our transportation costs or freight costs went up by $3 million or 30 basis points and that was on top of the increase from the prior quarter now I can tell you that in my discussions with our operations people. It looks like that amount is starting to level off.
Rates are leveling off and so we are.
So the guidance that we give.
Given our giving us to be up both in Q2 as well as.
On the in the second half.
Gotcha.
Really helpful. Okay.
And sorry, just had a chassis is that leveling off a relatively recent.
Amazon or is that something that you've observed through the course of the quarter.
That's just I mean, theres only been one month in this quarter, but so far they don't they.
You don't seem to be increasing at the same rate that they were in prior quarters.
Got you, Okay, I'm, sorry, I was I was trying to take the prior quarters. So they're kept increasing through your fiscal year. So another words.
Through through Q4, they continue to increase and <unk> and then in Q1, we they also increased another 30 basis points another.
Think of it as 30 basis points on lower revenues that the freight costs went up so I'm, saying in the current Q2, we see that leveling off.
Got it really helpful and sorry, and my very last one just as we think about your fiscal 'twenty two guidance.
You mentioned that both units and prices increased in your in your September quarter excuse me I'm wondering as we think about the sort of let's call. It 20 odd percent growth that Youre building in for your fiscal 'twenty. Two can you give us a rough sense for how much of that is going to come from pricing versus what's going to come from units.
I think thats.
That's too hard to judge.
Yes.
Okay. Okay.
Or would you be that it's going to be a combination of the two maybe I can leave it there for absolutely absolutely. Okay, alright, great. Thank you very much I'll start.
Your next question comes from now all Chomsky ask Northland capital market.
Yes, thanks for taking my follow up question.
Yes.
And Greg on the breakout relative to the three pillars of growth.
Laid out at your analyst day really appreciate that do.
Do you have color on how each of these trended on a year over year basis.
Relative to the overall here.
Yes, so we're actually on the verticals, we didn't we didn't we're not going back on a on it.
Year over year basis, because we really started tracking this closely.
Beginning with <unk>.
The fiscal year end.
So, but as each quarter now we will give a little bit.
More insight, but I can tell you that the one vertical that went down which was in the <unk>.
I'm sorry.
OEM and OEM appliance was really as I mentioned that was the digestion that I referred to from a couple of customers and we see that returning.
Purchasing returning in Q2.
Got it okay great.
Then.
What is the risk that the strong demand that youre seeing as a result of the supply chain disruptions and that you are having customers new customers come to you.
In an effort to go or triple source, a quadruple sourcing effectively alleviate their own supply chain issues.
Yes. This is <unk>.
Important.
Area, we watch very well so most of our all the pretty evenly.
Hum for Marvell up where all of the customer base. So at this moment.
And then specific risks codell.
So pretty evenly come from many customer in the form of amenity when.
Political and by the way I hope it in bulk solution.
<unk>.
We can simply.
Kind of the OLED and reconfigure it that season, so even even one customer slowdown we won't have to.
Kind of really hot.
Time for overall inventory.
Alright, I think that latter part is an excellent point, so maybe the strength of the incremental demand that youre seeing.
How much of that is coming in the form of.
The configuration.
At your competitors.
Typically without slide, but they're much more limited configuration, so that you provide.
Yes, I'm very happy to share most of our growth from our BD and bulk solution.
After we continue.
To emphasize the operating folks solution and be the most of the customer now putting her outfit in both solution.
It's easy to support the urgent demand and also there.
Yes.
Inventory risk will all stay on for himself.
Okay, Great and then my final follow up question as well.
Dave SG&A I think was down 4 million Q2 is that correct and why is that.
So we had a little bit lower we had first of all it was.
We had increased personnel costs and then we did have a little bit lower bonuses.
In Q2.
Oh I'm sorry in Q in Q1, I said Q2 and Q1 this year.
Alright got it thank you very much.
Okay.
Yes.
Your next question comes from John Chen Lin Zhang with CGS Securities.
Sure.
Hi, everybody. Thank you for taking my questions and great quarter and outlook.
David I was just wondering if you could clarify the sequential increase in gross margins whats getting that you. What are you where are you finding that is it mostly your selling prices catch up to inflation are expected to reduce some costs are realized some other efficiencies or is there a mix improvement as you go forward just to help me understand what's the sequential increase coming from.
Sure John Theres, a number of factors number one we expect to start gaining traction from our auto configure <unk> solutions.
We also had been exercising more price discipline and and also we've we've learned.
No.
How to manage how to better manage.
Yes.
Passing on of a freight.
Freight charges and other things.
Another cost increases to our customers so that along with the.
Some of the margins from our new product offerings give us.
Good.
Little bit better insight into margin growth.
Okay perfect.
Wanted to touch on the auto configure and BD.
You mentioned actually what was the sales that went through there.
I don't know if you can quantify it exactly but just give us a sense of how important that is to your growth and how big you expect it to be going forward in the next couple of quarters.
Is it will be very important, especially for a long time.
The fully predefined the cancel man power sales.
And the PM, what was causing them one by one but now we see in Tvs and data base not all nine facility able to help a customer.
Figure out what's about basic hungry ratio was at a pace that are pulled out for them and then a better days through our commenced interface service. So.
Almost all of our customized sales who had able use of that system are very happy with our service stream.
Time to communicate and make it a communication much more accurate.
<unk>.
Commendation.
<unk> mall.
Close tongue and pay their performance so for midterm long term.
Very optimistic at least.
<unk> data are convincing the base PDP system.
Great and maybe just the last one for me what is the margin of sales through that channel compared to your regular sales.
Resources.
Normally has been.
We did last year, we said that number yes, but basically now probably the PDP will be higher.
Because <unk> ultra com greater we are able to work with.
Many more customer and especially lots of middle sized enterprise customer now.
People, we can pick out one of the largest scale customer because we do not have any now are empowered to take care to make that call, but not with the automation have we are able to reach.
Minimal.
Middle sized enterprise accounts and for Rosa accounts as you know.
So imagine where big data.
Okay, great. Thank you.
Thank you.
Thank you and as a reminder to ask a question. Please press star one on your telephone keypad again to ask a question. Please press star one we will pause for just a moment to compile the Q&A roster.
At this time there are no further questions ladies and gentlemen, this concludes today's event.
You for your participation you may now disconnect.
Just one moment.
Oh wait one moment to Charles.
Alright.
Okay.
Today.
Thank you so much joining us.
<unk> made a happy to see you next.
Nice quarter again, thank you have a good day.
Thank you everyone you may now disconnect.
Please wait the conference will begin shortly.
Sure.
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