Q3 2023 Super Micro Computer Inc. Earnings Call
Speaker 2: Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today.
Speaker 2: At this time, I would like to welcome everyone to the Super Microcomputer Incorporated fiscal 3rd quarter 2023 results conference call.
Speaker 2: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again.
Speaker 3: Thank you, and I will now turn the conference over to Michael Stager, Vice President of Corporate Development. You may begin. Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the third quarter, which ended March 31, 2023. With me today, our Charles Leang founder, Chairman, and Chief Executive Officer and David Wigan.
Speaker 3: presentations tab. We've also published management 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 limitations those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook.
Speaker 3: including guidance for the fourth quarter of fiscal year 2023 and the full fiscal year 2023. There are a number of risk factors that can cause super-micro's future results to differ material from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon. Our most recent 10K filing for fiscal 2022 and our other SEC filings. All these documents are available on the Investor Relations page.
Speaker 3: a SuperLicero'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 the explanation of our non- GAAP financial measures, please refer to our company presentation or to our press release published earlier today. In addition, a reconciliation of gaps in on-gap results is contained in today's press release. And in a-
Speaker 4: The first year of the year, the total is 1.28 billion, and the total is 5% of the year. And below our initial guidance range, we previously announced.
Speaker 4: But our long gap earning per share grew over 5% year on year to $1.63 compared to $1.55 year ago. While the quarter did not afford us, we expect I'm strongly encouraged by our current business momentum. As we navigate market uncertainty, we saw our new generation X13, H13, and H1N2.
Speaker 4: leading edge product, especially in artificial intelligence.
Speaker 4: This new AI product demands from top tier companies has led us to challenge in terms of new key components availability. Compound with the economic heroine, our Q3 result was reflective of this difficulty yet.
Speaker 4: of a tuned condition.
Speaker 4: The good news is that we have already started to address this component shortage pressure over the past few months and we are in a much improved situation going forward.
Speaker 4: We have started to produce and ship some back-old synth apple.
Speaker 4: Here are a few highlights for the quote.
Speaker 4: First, the record pays of GPU leading-edge design wins, with growing back-order, including the winning expertise, two new global top 20 customers.
Speaker 4: Second, we differentiate our entire product portfolio based on new CPU, GPU, storage and fabric technology.
Speaker 4: from key partners including Nvidia, Intel, AMD and others.
Speaker 4: Third, increase customer demand of our Brax scale product and play solutions. And continue expansion and transitions from several stories hardware manufacturer to a total IT solution provided.
Speaker 4: A nine new generation product design with partner ecosystem is a high-rear complex. As I mentioned earlier, multiple key components shortage. They are our ability to manufacture and deliver new systems like the Delta next GPU system, last quarter. With the improvement components available with ability, this quarter, the new GPU system should prevent wear and ramp up quickly.
Speaker 4: Indeed, we continue to scale up our manufacturing campuses in US Taiwan, Nansaran, and Malaysia.
Speaker 4: so that we can support our revenue growth in a much larger scale in the coming quarters and years.
Speaker 4: By developing our in-house building broke design and manufacturing, we are well equipped to navigate the solar current economic ahead with our building broke solution architecture.
Speaker 4: We always deliver workload-optimized new product to market faster than competitors.
Speaker 4: Like with the recent NVIDIA H.100 Intel Cephalopod and AMD Genoa release.
Speaker 4: The power consumption and thermal challenge of these new technologies has risen dramatically.
Speaker 4: and 40 kW or even 60 kW and 80 kW drags the vision, the men are getting stronger and popular for computing, hungry, data center and industry.
Speaker 4: Having high power efficiency and air liquid thermal expertise have become one of our key differentiator of success. Combined with our Blooming Green Computing
Speaker 4: That saves customers much TCO savings, our time to market advantage and solution optimization via building block solutions. We anticipate continuing to gain many more new design wins with this new generation product in the quarters ahead.
Speaker 4: We have made solid progress in our total IT solution initiative by advancing our RACS scale solution capability. Provided, they are not supply constraints. We can design, build, meditate, process and deliver tone key RACS, deliver solution to customer within a few weeks of operation and order instead of insist from competitor. ShuffleMankles one stop shopping total IT strategy.
Speaker 4: including AI, server, storage, networking, software.
Speaker 4: and management features plus service. The idea is to let customers focus more on their applications and new software features. Leave the IT hardware solution to Shifu Michael from cloud to edge. Currently, we are on track to support up to 4,000 racks per month of global manufacturing capability and capacity.
Speaker 4: the idea is to debt customer folks more on their applications and new sort of features. Me for the IT hardware solution to Shifu Michael from cloud to age. Currently we are on track to support up to 4,000 racks per month of global manufacturing capability and capacity by the Canada EON.
Speaker 4: Our business is maintaining a growth rate that is multiple or over OIP industry.
Speaker 4: in the same period. We are doing so by efficiently taking market share in the new and faster growing market.
Speaker 4: We are also improving our cost structure by scaling through our Taiwan and upcoming Manashe campus, which will be online soon with some of our key partners. While our March quarter result has some challenges, our new generation of products are in high demand, especially for AI, and we anticipate more customers deploying our products in large scale, plus and play.
Speaker 4: We continue to emerge as one or larger global supply of total ID distribution and continue to gain much share.
Speaker 4: And technology keeps us confident of delivering Q4 revenue in the range of 1.7 to 1.9 billion. If supply condition improves enough, we expect to be above that range. Even some economic heroin is still ahead. In other world, I continue to expect our fiscal year 2024 revenue to be at least 20% year-over-year growth. And we are accelerating to reach our mid to long term.
Speaker 4: growth objective of $20 billion.
Speaker 4: of $20 billion per year.
Speaker 4: Now I will pass the code to David Wegan, our Chief Financial Officer, to provide additional details for the quarter. Thank you.
Speaker 5: Thank you, Charles. Fiscal Q3 2023 revenues were $1.28 billion, down 5% year-over-year, and down 29% quarter-over-quarter, which was below our initial guidance range of $1.42 to $1.52 billion.
Speaker 5: The shortfall was primarily due to key new component shortages for Supermicro's new generation server platforms, which have been mostly resolved to date.
Speaker 5: Our next generation AI platforms are driving record levels of design wins along with strong orders from top tier customers and a record backlog.
Speaker 5: We are well positioned for a strong finish to our fiscal year 2023 as we ramp up deliveries of our new platforms to key customers.
Speaker 5: due to high demand for our advanced AI
Speaker 5: Two-three results were driven by our high-growth AIGPU and RAC scale solutions, which represented approximately 29 percent of our total revenues. And we expect significant future growth.
Speaker 5: An existing cloud service provider customer represented more than 10% of revenues for the first time.
Speaker 5: On a quarter over quarter basis, key new platform component shortages and seasonality impacted our three end market verticals. On a year over year basis, we had growth in our OEM appliance and large data center vertical, reflecting momentum with new data center and CSP customers.
Speaker 5: versus 4% last quarter. Systems comprised 91% of total revenue and was up 2% year over year and down 30% quarter over quarter. Subsystems and accessories represented 9% of Q3 revenues and were down 43% year over year and down 16% quarter over quarter. On a year over year basis, the volume of systems and nodes shipped decreased, while system node ASPs increased due to higher product ASPs, especially for our AI product offerings. On a quarter over quarter basis, the volume of systems and nodes shipped decreased, and the volume of systems and nodes decreased due to higher product ASPs.
Speaker 5: due to lower shipments from component shortages while system node ASPs increased. Geographically during Q3, the US market represented 61% of revenues, Asia 17%, Europe 18%, and India 7%.
Speaker 5: and the rest of the world 4%. On a year-over-year basis, US revenues increased 3%, Asia decreased 31%, Europe increased 11%, and the rest of the world decreased 29%.
Speaker 5: On a quarter-over-quarter basis, U.S. revenues decrease 28%, Asia decrease 35%, Europe decrease 27%, and rest the world decrease 20%.
Speaker 5: The Q3 non-gap gross margin was 17.7%. This was down 110 basis points, quarter over quarter, and up 210 basis points, year over year.
Speaker 5: data center, and CSP customers. Secondly, lower factory efficiency from smaller sales volume and a learning curve in the production ramp of new platforms. The company's mainstream server business margin profiles were generally on par with last quarter. As we focus on gaining market share with our new AI platforms, we will target the optimal mix of revenue growth, gross margin, and operating profit to create long-term value for our shareholders.
Speaker 5: Turning to operating expenses, Q3 op-X on a gap pace is increased by 4% quarter over quarter and increased 5% year over year to 127 million.
Speaker 5: On a non-GAAP basis, operating expenses increased 7% quarter over quarter and increased 6% year over year to $116 million.
Speaker 5: OPEX increased sequentially due to lower NRE and marketing credits for new platform launches and higher headcount. The non-GAAP operating margin was 8.7% for the quarter versus 12.8% last quarter and 7.5% a year ago due to lower revenues and lower gross margins. The lower income and expense was approximately $1.4 million in expense, primarily consisting of interest expense of $1.3 million and a small FX loss as compared to $1.8 million in interest.
Speaker 5: expense and a $6.3 million FX loss last quarter. Interest expense decreased sequentially as we paid down some working capital loans last quarter. The tax provision for Q3 was $11 million on a GAAP basis and $15 million on a non-GAAP basis.
Speaker 5: The gap tax rate for Q3 was 11% and non-gap tax rate was 14%. Our tax rates were lower sequentially due to higher discrete tax benefits realized in Q3. Lastly, our share of income from our joint venture was a loss of $1 million this quarter as compared to a loss of $1.4 million last quarter.
Speaker 5: We delivered Q3 non-gap diluted earnings per share of $1.63, which was up 5% year-over-year and down 50% quarter-over-quarter due to the lower revenues, lower gross margins, and higher operating expenses quarter-over-quarter. Turning to the balance sheet and working capital metrics compared to less quarter-over-quarter,
Speaker 5: Our Q3 cash conversion cycle was 126 days versus 95 days in Q2. Days of inventory was 126, which was up by 27, as we built inventory to fulfill large new customer orders. Q4 powder product
Speaker 5: Days sales outstanding rose 13 days quarter over quarter to 51 days while days payables outstanding increased by nine days to 51. Working capital metrics were impacted by the again by the new platform component shortages which increased inventory and lengthen the cash conversion cycle as we could not fulfill.
Speaker 5: positive cash flow from operations of 198 million versus 161 million in Q2.
Speaker 5: Despite our quarter-over-quarter revenue decline, our operating cash flow benefited from continued profitability and the conversion of accounts receivable to cash.
Speaker 5: CAPEX was $8 million for Q3, resulting in positive free cash flow of $190 million versus positive free cash flow of $151 million last quarter. The closing balance sheet cash position was $363 million.
Speaker 5: Total bank debt increased to $187 million as we increased our debt by $17 million during the quarter, while net cash increased to $176 million in Q3 from $135 million in Q2 due to strong operating cash flow. During Q3, we repurchased 1.55 million shares of our common...
Speaker 6: repair repurchases.
Speaker 5: Now turning to the outlook for our business, we have a strong backlog of orders for new platforms entering the seasonally strong June quarter. We are working diligently with our strategic partners and customers to fulfill their requirements and are making steady progress in easing key supply constraints.
Speaker 5: Now, turning to the outlook for our business, we have a strong backlog of orders for new platforms entering the seasonally strong June quarter. We are working diligently with our strategic partners and customers to fulfill their requirements and are making steady progress in easing key supply constraints. For the fourth quarter of fiscal 2023,
Speaker 5: Which ended in June 30, 2023, we expect net sales in the range of 1.7 billion to 1.9 billion. Gap diluted net income per share of $2.13 to $2.65.
And non-gap diluted net income per share of $2.21 to $2.71. We expect gross margins to be approximately 17% as we focus on gaining market share with our strategic new customers and platforms.
As we improve our production efficiencies on the new platforms and gain scale with our customers, we expect our gross margins to improve.
However, in the current AI growth AI market environment, we will continue to balance market share gains with growth margins. GAP operating expenses are expected to be 145 million, which includes approximately 10 million in expected stock based.
Compensation and other expenses that are excluded from non-gap, diluted net income per common share. Gap and non-gap operating expenses are expected to increase in
The company's projections for GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 14.7%, a non-GAAP tax rate of 15.7%, and a fully diluted share count of 56 million for GAAP and 57 million shares for non-GAAP . The outlook for the fiscal fourth quarter of 2023 is a
fully diluted GAAP EPS includes approximately $7 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 fourth quarter of 2023 to be in the range of 11 to 14 million dollars.
For the fiscal year 2023 ending June 30, 2023, we are tightening our guidance for revenues from a range of $6.5 to $7.5 billion to a range of $6.6 billion to $6.8 billion, which would represent year-over-year growth.
of 27% to 31%. GAAP diluted net income per share from a range of $8.50 to $11 to a range of $10.14 to $10.66 and non-GAAP diluted net income per share from a range of $9 to $11.30
and a rate of 16% for non-GAAP net income.
For fiscal year 23, we are assuming a fully diluted share count of 56 million shares per gap and 57 million shares for non-gap.
The outlook for fiscal year 2023 fully diluted gap earnings per share includes approximately 33 million in expected stock based compensation and other expenses, net of tax effects that are excluded from non-gap diluted net income per comment share.
For fiscal year 2024, we are expecting a revenue growth of at least 20% based on strong customer demand for our best-in-class new AI platforms and total IT solutions. We remain confident in our long-term outlook for robust revenue growth in the coming year.
Q&A.
Operator
Thank you. At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
We will take our first question from Nihal Chokshi with Northland Capital Markets. Your line is open. Your line is open.
Yeah, thank you. Very impressive, the buyback rate of $150 million in a quarter of $100 shares. Very strong statement that the shares are attractive prices.
SuperMylco can operate at the high end of the target model that you guys communicated two years ago, that being the 14 to 17 percent gross margin range. Yeah, indeed, our confidence is very good. So again, because the economic headwind, so we try to be more conservative here, but at least 20% over your growth, and we expect, we hope for more than that for sure.
And what about with respect to gross margin? Yeah, so, so now we, yeah, back two years ago, we gave a seventeen to twenty one percent to twenty three percent top line growth. Obviously, we were in there at a minimum of twenty percent.
And for the gross margins, we continue to, like I said, to wrestle with taking market share and also balancing that against gross margins. But we're confident with our new manufacturing facilities coming online that we will be able to improve our gross margins.
And we also, as we come out of this corridor and we begin to ramp our new product offerings, that we will be able to improve margins as well.
Okay great and are you guys seeing any signs of general corporate IT demand weakness as the CDW pre-announced has indicated? Yeah the general IT market has slowed down a little bit but the good thing is that we have a lot of high-end...
strong demand. So overall, our growth will be strong.
Okay, and then did you guys have any 10 plus percent customers in the quarter and any expectations that I would contribute within the June quarter as well? So we did have a new 10% customer this quarter. They're not a new customer, but they're a new 10% customer. Okay.
And we expect from quarter to quarter, Neholt, depending on the delivery of our design wins, we will see other customers achieve over 10% of our revenue. So that will continue to happen.
And is that the expectation that there will likely be a new 10% customer pop up within the June quarter? It's very possible.
Yeah, but at the same time we are also gradually growing our brand name through our channel, through our retail, and also through online business. So we try to balance the growth between the larger account and lots of small accounts. And that's all there is to it.
Great. Great job, guys. Thank you very much.
Great job, guys. Thank you very much. Thank you.
We'll take our next question from Mehdi Hosseini with SIG. Your line is open. Yes, thanks for taking my question. A couple of follow-ups for me. I want to better understand. I remember last Earning Confidence call you discussed your confidence in the backlog. That's the best exit line. Close.
And back then, there was a little bit of a push out of the revenue opportunities from perhaps March into June , but you were very confident that as we approach June and September , it should materialize. And now the magnitude of that revenue push out.
was more than expected. So what happened if you were confident with the backlog in January , what prevented you to procure the key components? I have a follow up.
Sure, there was a shift, there was a dramatic shift toward new AI solutions, METI. And so therefore, it was larger than anyone expected. And so the parts availability constrained the amount of shipments that we could do. We anticipated.
a slower quarter because the third quarter is seasonally slower. And we also mentioned, you're correct, we also mentioned some customers that tapped the brakes and moved out to Q2. But it was really the component shortages that hit us this quarter. Yeah, I'm going to go to T1. We have some customer post.
including GPU, CPU combination, and kind of high power thermal solution. So we did a very big effort to pull in those components. And now situation has been dramatically improved. That's why we're looking up pretty good for June quarter.
Thank you for details. There is one cash flow item. In the December quarter, you were able to work on inventory, but then there was one non-working capital item which caused the decline in cash flow from operations.
Now this quarter, March, it was actually the other way. You had to purchase inventory, but there was a positive non-working capital item that came in. Can you help me understand how I should think about these dynamics in working capital and how is it going to change looking forward?
this fourth quarter is going to be challenging for me because we are going to be moving, acquiring a lot of inventory. And so that will challenge our cash flows during this quarter. So that's something.
So what that does is it caused our working capital metrics to go down a little bit, and that's evident in our cash conversion cycle. But I would say that, you know, in spite of that, we generated some of our best cash flow. We generated almost 200 million in cash flow, and we returned 150 million of that to the shareholders. So what I would say is that, yeah, going into Q4, cash flow is very important. But I think ultimately the business has shown that it generates very good cash flows.
As a reminder, it is star one if you would like to ask a question. And we will take our next question from Anamba Barua with Loop Capital. Your line is open. Yeah, good afternoon, guys. Thanks for taking the question. I really appreciate it. Two, if I could. This is an open question.
At the risk of asking maybe the obvious, I think 90 days ago you guys had, Charles, said on your earnings call that you had expected in the second half of this calendar year, the September-December quarter, to be in a position to be in a position to be in a position
At the risk of asking maybe the obvious, I think 90 days ago you guys had Charles said on your earnings call that you had expected in the second half of this calendar year. It says September , December quarter to be in a position to start.
This is the way that I interpreted Charles making a regular part of your book of business, the layering in of larger projects from the cloud cadre, from the AI cadre like that. And I guess my question is...
Are you seeing, is what we're seeing in the June quarter that you're talking about, is that a pull forward of what 90 days ago we're anticipating later this year? So is that dynamic happening sooner, kind of as you would describe it holistically? Or is this something different than that? And then I have a follow up, appreciate it.
1.9 billion. That's based on some shortage though. If we can find those parts quicker, then indeed the June quarter will be much stronger than that. And September quarter, that's why you say, that's why your question, is September quarter we will continue to be very strong. And as well as December quarter I believe.
So now the 3D problem is a shortage. So we have to build other components for inventory at the same time. We are not quite sure how much we can grow in this quarter. But for sure 1.7 to 1.9 should be a very safe number.
Really appreciate that. That's helpful context. And then I guess the follow-up is for Dave, Dave for you. Just with regards to your gross margin comments.
Any greater context you can share that's responsible. I realize that this is at the front end of beginning to mix in some of this larger footprint business, but I would love to get a better understanding of how you guys are thinking about the gross margin manifestation.
if we think about the continued layering in of larger footprint, which may come at a slightly lower margin, is it really
that over time we should expect a greater presence of that lower margin business with some efficiency gains or is it just in the beginning here the margin will be lower for the new business but then collectively the P&L gross margin expands over time. Yeah.
So we're looking at it in your latter alternative, Ananda, and here's why. So right now there's three things that we've been facing. We're having to face more air transportation costs.
in order to make our deliveries. So that impacts our margin. And also we're having to pay other expedite fees. That impacts our margin. Number two, we ran a lot less through our factories than in Q3 than we did in Q2.
So your margin efficiency, your ability to spread your fixed costs, you know, it's tremendously impacted on a smaller scale. So as we scale up, we improve our margins.
Thirdly, as we ramped our new product offerings, there is an efficiency on the production of these new products. So we are going to improve the efficiency of these products.
which will improve the margin. And so those three things alone, you know, speak to margin improvements. But again, we are, we have, we believe we have best of breed AI products. And those are in high demand. And people are coming to us. And so we,
we're very strategic about taking the market.
Yeah, I can add some colors. I mean, as I shared, we are building $20 billion of revenue, hopefully in the meantime, and that's why grow capacity and support large customers is very important to us. Once our volume becomes higher, our cost will be improved.
and then business operation efficiency will be higher. So we are doing very aggressive way to grow our revenue. And so I mean, once we start to reach that number, under 10 to $20 billion, I guess our
growth margin will start to grow because we won't always invest for bigger growth after that. I appreciate that context, guys. Thanks a lot.
And we will take follow-up questions from Mehdi Hosseini with SIG. Your line is open.
Yes, a couple of follow-ups. David, did you say that the op-x for the June quarter will be around 145 million? Let's see. That sounds about, we gave both Gap and non-Gap guidance. Maria.
So our.
It's in the non-depth with 145. Yeah, that's true. Let's see.
Yeah, yeah, 145 for gap. Thank you.
Yeah, yeah, 145 for gap. I'm sorry gap or non gap.
It was gap is going to be 145. And that includes 10 million in expected stock based comps. So that means 135 for non-gap.
Okay, that's what I was looking for. And then, Capac for the June quarter. We said 11 to 14 million.
Okay and then capex for the June quarter? We said $11 to $14 million.
And ladies and gentlemen, this concludes our question and answer session and today's conference call. We thank you for your participation and you may now disconnect. Please wait, the conference will begin shortly.
I.