Q3 2026 Super Micro Computer Inc Earnings Call

May 5, 2026

Speaker #1: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. third quarter 2026 earnings call.

Operator: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. Q3 2026 Earnings Call. With us today are Charles Liang, Founder, President, and Chief Executive Officer, David Weigand, Chief Financial Officer, and Michael Staiger, Senior Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star followed by 1 on your telephone keypad. If you'd like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Michael Staiger. Please go ahead.

Speaker #1: With us today are Charles Liang, founder, president, and chief executive officer; David Weigand, chief financial officer; and Michael Staiger, senior vice president of corporate development.

Speaker #1: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, at that time, simply press star followed by the number 1 on your telephone keypad.

Speaker #1: And if you'd like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Michael Staiger.

Speaker #1: Please go ahead.

Speaker #2: Hey, good afternoon. Thank you for attending Super Micro's call to discuss financial results for third quarter fiscal 2026, which ended March 31st, 2026. As you know, with me today are Charles Liang, founder, chairman, and chief executive officer; David Weigand, chief financial officer.

Michael Staiger: Hey, good afternoon. Thank you for attending Supermicro's call to discuss financial results for Q3 fiscal 2026, which ended 31 March 2026. As you know, with me today are Charles Liang, founder, Chairman, and Chief Executive Officer, David Wiegand, Chief Financial Officer. By now, you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the investor relations section of the company's website under the Events and Presentations tab. We've also published management's scripted commentary on our website.

Speaker #2: By now, you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website.

Speaker #2: As a reminder, during today's call, the company will refer to a presentation and is available to participants in the investor relations section of the company's website.

Speaker #2: Under the events and presentations tab, we've also published management's scripted commentary on our website. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue gross margin, operating expenses, other income, and expenses, taxes, capital allocation, future business outlook, including guidance for the fourth quarter fiscal year 2026 and the full fiscal year 2026.

Michael Staiger: Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, future business outlook, including guidance for Q4 of fiscal year 2026 and the full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause the actual results or even events to materially differ from those anticipated. You should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier today, our most recent 10-K filing for fiscal 2025, and other SEC filings. All these documents are available on the IR page of Super Micro's website. We assume no obligation to update any forward-looking statements.

Speaker #2: These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause the actual results or even events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements.

Speaker #2: You can learn more about these risks and uncertainties in the press release we issued earlier today. Our most recent 10-K filing for fiscal '25 and other SEC filings.

Speaker #2: All of these documents are available on the IR page of Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook.

Michael Staiger: Most of today's presentation refers to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the company presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors with a means of evaluating and understanding how management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to financial measures prepared in accordance with the US GAAP. A reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our Q4 fiscal 2026 quiet period begins at the close of business Friday, 12 June 2026.

Speaker #2: For an explanation of our non-GAAP financial measures, please refer to the company presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors with a means of evaluating and understanding how management evaluates the company's operating performance.

Speaker #2: These non-GAAP measures should not be considered in isolation from, as substitute for, or superior to financial measures prepared in accordance with US GAAP. In addition, a reconciliation of GAAP to non-GAAP results is obtained in today's press release and in the supplemental information attached to today's presentation.

Speaker #2: At the end of today's prepared remarks, we will have a Q&A session for Southside analysts. Our fourth quarter fiscal 2026 quiet period begins at the close of business Friday, June 12th, 2026.

Speaker #2: And for now, I will turn the call over to Charles.

Michael Staiger: For now, I will turn the call over to Charles.

Speaker #3: Thank you, Michael. And thank you all for joining today's call. We had significant business value growth with our technology leadership and market expansion. However, before I discuss the specifics of the quarter, I want to provide an update on the recent developments regarding the endowment of certain individuals, formerly associated with the company.

Charles Liang: Thank you, Michael, and thank you all for joining today's call. We have significant business value growth with our technology leadership and market expansion. However, before I discuss the specifics of the quarter, I want to provide an update on our recent development regarding the indictment of certain individuals formerly associated with the company. I must be clear, Super Micro is not a defendant, nor a target or a grand jury investigation. Super Micro has zero tolerance to any employee who violates federal law and regulation. I am personally shocked and saddened by these alleged actions, which in no way represent the value or ethic of this company. We took immediate action by terminating our relationship with the defendants and are helping and cooperating fully with the US government.

Speaker #3: I must be clear: Super Micro is not a defendant nor a target or a grand jury investigation. And Super Micro has zero tolerance to any employee who violate the federal law and regulation.

Speaker #3: I am personally shocked and saddened by this logic action. Which, in no way, represents the value or ethics of this company. We took immediate action by terminating our relationship with the defendant and are helping and cooperating thoroughly with the US government.

Speaker #3: Additionally, our independent directors have launched a thorough independent investigation with top forensic and legal firms to ensure we continue to maintain the highest standard of integrity.

Charles Liang: Additionally, our independent directors have launched a thorough independent investigation with top forensic and legal firms to ensure we continue to maintain the highest standard of integrity. We are not waiting for this process to finish. We are further strengthening our global trade compliance program under expert leadership. Not only is Super Micro fully committed to protecting advanced American technology and following the highest ethical and business standard, but continue to expand our manufacturing footprint right here in United States. Again, the alleged actions of a few individuals do not define us. Our focus remains on doing extraordinary work for our customers and partners and leading the industry with transparency and excellence. Now let's talk about our quarter. This was a quarter defined by value and focus for Super Micro.

Speaker #3: We are not waiting for this process to finish. We are further strengthening our global trade compliance program under expert leadership. Not only is Super Micro thoroughly committed to protecting and advancing American technology and following the highest ethics and business standard, but continue to extend our manufacturing footprint right here in the United States.

Speaker #3: Again, the logic actions or a few individuals do not define us. Our focus remains on doing extraordinary work for our customers and partners and leading the industry with transparency and excellence.

Speaker #3: Now, let's talk about the quarter. This was the quarter defined by value and focus for Super Micro. Despite the industry-wide shortage of key components, including CPU, GPU, and memory, our business continues to grow and expand.

Charles Liang: Despite the industry-wide shortage of key components, including CPU, GPU, and memory, our business continues to grow and expand. Our back order is now in another record high. We advanced and optimized our orders data center infrastructure using our leading Direct Liquid Cooling DLC technology. Our focus remains on delivering the fastest time to online, TTO, in the industry, ensuring our customers can scale their AI factories quickly and most efficiently. Our fiscal Q3 revenue of $10.2 billion was impacted by customer site readiness delay, our business fundamentals are stronger than ever. This is purely a short-term delay. Several customer sites were not yet equipped with the power and networking required for their cloud deployment, we expect to capture this revenue in the coming quarters.

Speaker #3: Indeed, our backorder is now at another record high. We advance and optimize the orders data center infrastructure using our leading direct liquid cooling (DLC) technology.

Speaker #3: Our focus remains on delivering the fastest time to online TTO in the industry ensuring our customers can scale their AI factories quickly and most efficiently.

Speaker #3: While our physical Q3 revenue of $10.2 billion was impacted by customers' side readiness delay, our business fundamentals are stronger than ever. This is purely a short-term delay.

Speaker #3: Several customers' side were not yet equipped with the power and networking required for their cloud deployment and we expect to capture this revenue in the coming quarters.

Speaker #3: One of the most significant achievements this quarter was our gross margin recovery, which increased significantly to 10.1% non-GAAP, representing a 58% improvement over the 6.4% non-GAAP reported in the previous quarter.

Charles Liang: One of the most significant achievements this quarter was our gross margin recovery, which increased significantly to 10.1% non-GAAP, representing a 58% improvement over the 6.4% non-GAAP reported in the previous quarter. We are committed to achieving a sustainable double-digit gross margin model by increasing our focus on enterprise market and our DCBBS business. Here are some key growth drivers. First, market strength. Business remains very strong in the NeoCloud, Sovereign AI, and Agentic AI segments. We have been aggressively fostering the traditional enterprise and storage business for about 1 year. We start to see strong growth. Growing opportunities. Our Data Center Building Block Solutions, DCBBS, continue to attract old and new customers' interest and create new profit streams.

Speaker #3: We are committed to achieving a sustainable double digital gross margin model by increasing our focus on enterprise market and our DCPPS business. Here are some key growth drivers.

Speaker #3: First, market strength. Business remains very strong in the near cloud solving AI and agentic AI segment. We have been aggressively fostering the traditional enterprise and storage business for about one year.

Speaker #3: And we start to see strong growth. Growing opportunities. Our data center building block solution, DCPPS, continues to attract old and new customers' interest. And create new profitable streams.

Speaker #3: By offering a total data center solution that includes complete liquid cooling facility, management software, networking, and service, we are providing much more value to our customers.

Charles Liang: By offering a total data center solution that includes complete deep cooling facility, management software, networking, and service, we are providing much more value to our customers as they committed to our total solutions. Product mix and efficiency. We improve our product mix with some more unique value product in this quarter and thereafter. We also advance our design of manufacturing, DFM, and more automation in our factories to build the products faster with higher yield rate and quality. Supply chain. We successfully managed inventory through a dynamic supply environment and took actions to reduce tariff related cost inflation. These efforts have improved flexibility of tech margin and support customer delivery timeline. Here is the bigger story. Super Micro is evolving from a US-based server designer and manufacturer into a total data center solution provider.

Speaker #3: As they commit to our total solutions. Product mix and efficiency. We improve our product mix with some more unique value products in this quarter.

Speaker #3: And thereafter. We also advance our design of manufacturing. The FM and more automation in our factories. To build a product faster with higher ERA and quality.

Speaker #3: And supply chain. We successfully manage inventory through a dynamic supply environment and took actions to reduce tariff-related cost ratio. These efforts help improve flexibility, protect margin, and support customer delivery timeline.

Speaker #3: Here is the bigger story. Super Micro is evolving from a US-based server designer and manufacturer into a total data center solution provider. We expand our business to help customers planning, building, deploying, and servicing data center infrastructure for global enterprise and near cloud provider especially.

Charles Liang: We expand our business to help customer planning, building, deploying, and servicing data center infrastructure for global enterprise and NeoCloud provider especially. Our DCBBS business is essential to this transformation, providing almost everything a customer needs to build an AI factory, including cooling units, networking, power shelf, battery backup, management software, and many other data center subsystems. Our DCBBS business continues to grow exactly as what we planned, showing a consistent and accelerating contribution to our top line and bottom line quarter over quarter. I believe our DCBBS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years, we have consistently turned industry disruption into innovation and new strong opportunities. One of the key value and drivers of our DCBBS business is our data center end-to-end management software.

Speaker #3: Our DCPPS business is essential to this transformation. Providing almost everything a customer needs. To build a AI factory including cooling units, networking, power cell, battery backup, management software, and many other data center subsystems.

Speaker #3: Our DCPPS business continues to grow exactly as what we planned. Showing a consistent and accelerating contribution to our top nine and bottom nine. Quarter over quarter.

Speaker #3: And I believe our DCPPS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years, we have consistently turned industry disruption into innovation and new strong opportunities.

Speaker #3: One of the key value and drivers of our DCPPS business is our data center end-to-end management software. We see significant demand for the Super Micro data center and cloud software suite.

Charles Liang: We see significant demand for the Super Micro data center and cloud software suite, including our SuperCloud Composer, that manage tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage, cooling status, safety condition, and device utilization, alongside many other critical features. Our management software feature also include advanced CPU and GPU workload orchestration, which is a critical function for today's AI data center. The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarter ago to $34 million last quarter and more than $46 million dollars books for this quarter. By bundling subscription-based software and service alongside our hardware, we are strengthening our customer relationship and improving our long-term profitability.

Speaker #3: Including our Super Cloud Composer, that manages tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage.

Speaker #3: Cooling status, safety condition, and device utilization, alongside many other critical features. Our management software feature also includes advanced CPU and GPU workload orchestration, which is a critical function for today's AI data center.

Speaker #3: The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarters ago.

Speaker #3: To $34 million last quarter and more than $46 million booked for this quarter. By bundling subscription-based software and service alongside our hardware, we are strengthening our customer relationship and improving our long-term profitability.

Speaker #3: We expect DCPPS, including software and service, to continue its rapid growth and to become a major part of our key value management. We continue to grow and expand our partnership with many key suppliers.

Charles Liang: We expect DCBBS, including software and service, to continue its rapid growth and to become a major part of our key value very soon. We continue to grow and expand our partnership with many key suppliers. Especially with NVIDIA, we are currently shipping many SKU of their latest rack scale systems, including GB300 NVL72, many HGX B300 SKU, GB200 NVL4, and the Inferencing Application Optimized RTX product lines. We are preparing to be among the first to market with the new Vera Rubin systems, including the GB200 NVL72 SuperCluster. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD CDNA solutions, featuring EPYC, Venice, and MI400 series of products.

Speaker #3: Especially with NVIDIA, we are currently shipping many skilled or relative rack-scale systems. Including GB300MVL72, many B300HGX skilled, B200MVL4, and the influencing application optimized RTX product lines.

Speaker #3: And we are preparing to be among the first to market with the new Vera Rubin systems. Including the MVL72 super cluster. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD Helios solutions.

Speaker #3: Featuring APEC Venus and MI400 series. Of products. In addition, we are working closely with Intel and ARM on the development of upcoming Xeon 6 Plus platforms.

Charles Liang: In addition, we are working closely with Intel and Arm on the development of upcoming Xeon 6+ platforms and a new addition to our portfolio, including Arm AGI CPU-based solutions. This system will deliver exceptional performance per watt, specifically optimum for the growing demand of Agentic AI workloads. By leveraging Supermicro's system building block solution rack and data center scale building block architecture, we can efficiently support a wide variety of compute platform and optimize them for different business verticals. Moving on to our footprint. We are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia, and Netherlands are all ramping up aggressively. Domestically, we recently announced our largest US site to date, a new DCBBS campus in Silicon Valley, just one mile away from our headquarters.

Speaker #3: And a new addition to our portfolio. Including ARM AGI GPU-based solutions. These systems will deliver exceptional performance per watt. Specifically, optimized for a growing demand of agentic AI workloads.

Speaker #3: By leveraging Super Micro's system building block solution rack and data center scale building block architecture. We can efficiently support a wide variety of compute platforms and optimize them for different business verticals.

Speaker #3: Moving on to our footprint. We are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia, and Netherlands are all ramping up aggressively.

Speaker #3: Domestically, we recently announced our largest US site to date. A new DCPPS campus in Silicon Valley just one mile away from our headquarters. This brings our total Bay Area footprint to nearly 4 million square feet.

Charles Liang: This bring our total Bay Area footprint to nearly 4 million square feet, featuring 8 new buildings optimized for innovation, design, production, and validation over our next generation end-to-end data center total solutions. Within this new campus, we are building multiple large-scale validation and production facilities. Some of them including a clean room specifically to support our new DLC 2.0 subsystem and next generation networking solutions, including advanced optical photonics-based device. With these expansions, we are on track to produce more than 6,000 of the world's most powerful state-of-the-art rack for months. In closing, Supermicro continue to scale out revenue and scale up value. We have strengthened our governance, delivering a meaningful margin recovery and expanded DCBBS, growing in both volume and value through software, networking, service, and more.

Speaker #3: Featuring eight new buildings optimized for innovation design, production, and validation over the next generation end-to-end data center total solutions. Within this new campus, we are building multiple large-scale validation and production facilities.

Speaker #3: Some of them including clean room specifically to support our new DLC2 subsystem and next-generation networking solutions. Including advanced optical photonics-based device. With this expansion, we are on track to produce more than 6,000 over the world's most powerful state-of-the-art rack per month.

Speaker #3: Including Super Micro continue to scale up revenue and scale up value. We have strengthened our governance, delivering a meaningful margin recovery and expanded DCPPS growing in both volume and value through software networking service and more.

Speaker #3: Our leadership in DLC technology pays our ability to deliver rack-scale total solution at an industry's fastest time to online. We are continuing to fuel our strong growth.

Charles Liang: Our leadership in DLRC technology pair our ability to deliver rack-scale total solution at the industry's fastest time to online will continue to fuel our strong growth, keeping Supermicro at the center of the AI revolution. With that, I remain very bullish about our growth in the AI and data center market. For Q1, we target $12 billion, given stable supply conditions. For the full year, we target $40 billion. I will turn this over to David.

Speaker #3: Keeping Super Micro at the center of the AI revolution. With that, I remain very bullish about our growth in the AI and data center market.

Speaker #3: For the first quarter, we target $12 billion giving stable supply conditions. For the full year, we target $40 billion. I will turn this over to David.

Speaker #2: Thank you, Charles. Fiscal Q3, FY26 revenue was $10.2 billion, up 123% year over year, and down 19% quarter over quarter. As Charles mentioned, Q3 revenue was impacted by data center and customer readiness.

David Weigand: Thank you, Charles. Fiscal Q3 FY 2026 revenue was $10.2 billion, up 123% year over year and down 19% quarter over quarter. Charles mentioned, the Q3 revenue was impacted by data center and customer readiness together with industry-wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remain strong across our customer base, driven by AI infrastructure demand, with AI GPU-related platforms contributing over 80% of revenue. During Q3, the enterprise channel revenue totaled $2.8 billion, representing about 28% of revenue versus 15% in the prior quarter. This was up 46% year over year and up 45% quarter over quarter.

Speaker #2: Together with industry-wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remain strong across our customer base driven by AI infrastructure demand with AI GPU-related platforms contributing over 80% of revenue.

Speaker #2: During Q3, the enterprise channel revenue totaled $2.8 billion. Representing about 28% of revenue versus 15% in the prior quarter. This was up 46% year over year and up 45% quarter over quarter.

Speaker #2: The OEM appliance and large data center segment revenue was $7.4 billion. Representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year over year and down 31% quarter over quarter.

David Weigand: The OEM appliance and large data center segment revenue was $7.4 billion, representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year over year and down 31% quarter over quarter. For Q3 FY 2026, we had 2 existing customers, each representing more than 10% of revenues. One large data center customer at 27% of revenues and one enterprise customer at 10% of revenues. By geography, the US represented 69% of Q3 revenue, Asia 13%, Europe 7%, and rest of world 11%.

Speaker #2: For Q3, FY26, we had two existing customers each representing more than 10% of revenues. One large data center customer at 27% of revenues and one enterprise customer at 10% of revenues.

Speaker #2: By geography, the US represented 69% of Q3 revenue; Asia 13%; Europe 7%; and rest of world 11%. On a year-over-year basis, US revenue increased 154%; Asia grew 1%; Europe grew 146%; and the rest of world increased nearly 500%.

David Weigand: On a year-over-year basis, US revenue increased 154%, Asia grew 1%, Europe grew 146%, and the rest of world increased nearly 500%. On a quarter-over-quarter basis, US revenue decreased 36%, Asia increased 17%, Europe increased 105%, and the rest of the world increased 392%. The Q3 non-GAAP gross margin was 10.1%, up from 6.4% in Q2. Gross margins were ahead of expectations, driven by our customer and product mix together with lower tariffs, expedite, and inventory reserve charges. Q3 GAAP operating expenses were $393 million, which was up 34% year-over-year and up 21% quarter-over-quarter.

Speaker #2: On a quarter-over-quarter basis, U.S. revenue decreased 36%; Asia increased 17%; Europe increased 105%; and the rest of the world increased 392%. The Q3 non-GAAP gross margin was 10.1%.

Speaker #2: Up from 6.4% in Q2. Gross margins were ahead of expectations driven by our customer and product mix together with lower tariffs expedite and inventory reserve charges.

Speaker #2: Q3 gap operating expenses were $393 million which was up 34% year over year and up 21% quarter over quarter. On a non-gap basis, operating expenses were $278 million up 29% year over year and up 16% quarter over quarter.

David Weigand: On a non-GAAP basis, operating expenses were $278 million, up 29% year-over-year and up 16% quarter-over-quarter. Both GAAP and non-GAAP operating expenses were up quarter-over-quarter due to higher headcount related expenses. Non-GAAP operating margin for Q3 was 7.3% compared to 4.5% in Q2. Other income and expense for Q3 totaled a net expense of $15 million, reflecting $49 million in interest and other income, offset by $64 million in interest expense related to convertible notes and the revolving credit facilities. The tax provision for Q3 was $127 million on a GAAP basis and $156 million on a non-GAAP basis, resulting in a GAAP tax rate of 20.8% and a non-GAAP tax rate of 21.1%.

Speaker #2: Both GAAP and non-GAAP operating expenses were up quarter over quarter due to higher headcount-related expenses. Non-GAAP operating margin for Q3 was 7.3% compared to 4.5% in Q2.

Speaker #2: Other income and expense for Q3 totaled a net expense of $15 million reflecting $49 million in interest and other income offset by $64 million in interest expense related to convertible notes and the revolving credit facilities.

Speaker #2: The tax provision for Q3 was $127 million on a gap basis and $156 million on a non-gap basis resulting in a gap tax rate of 20.8% and a non-gap tax rate of 21.1%.

Speaker #2: The Q3 gap diluted earnings per share was $72 cents compared to guidance of at least 52% and non-gap diluted EPS was $84 cents versus guidance of at least 60 cents due to higher gross margins.

David Weigand: The Q3 GAAP diluted earnings per share was $0.72 compared to guidance of at least $0.52, and non-GAAP diluted EPS was $0.84 versus guidance of at least $0.60 due to higher gross margins. The GAAP fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3, while the non-GAAP share count was largely flat at 709 million in Q3 compared to Q2. Cash flow used in operations for Q3 was $6.6 billion compared to $24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of $581 million.

Speaker #2: The gap fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3 while the non-gap share count was largely flat at 709 million in Q3 compared to Q2.

Speaker #2: Cash flow used in operations for Q3 was $6.6 billion compared to $24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of $581 million.

Speaker #2: These factors were only partially offset by higher net income and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was $11.1 billion up from $10.6 billion in Q2.

David Weigand: These factors were only partially offset by higher net income and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was $11.1 billion, up from $10.6 billion in Q2. CapEx for Q3 totaled $80 million, resulting in -$6.7 billion for the quarter. At quarter end, our cash position totaled $1.3 billion. Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible note debt was $8.8 billion, resulting in a net debt position of $7.5 billion, compared to a net debt position of $787 million in the prior quarter.

Speaker #2: Capex for Q3 totaled $80 million resulting in negative free cash flow of $6.7 billion for the quarter. At quarter end, our cash position totaled $1.3 billion.

Speaker #2: Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible note debt was $8.8 billion resulting in a net debt position of $7.5 billion.

Speaker #2: Compared to a net debt position of $787 million in the prior quarter. In addition to using our existing US revolving credit facility and non-recourse AR sale facility we set up and commenced usage of a $1.8 billion Taiwan revolving credit facility to further support working capital requirements.

David Weigand: In addition to using our existing US revolving credit facility and non-recourse AR sale facility, we set up and commenced usage of a $1.8 billion Taiwan revolving credit facility to further support working capital requirements. Turning to the balance sheet and working capital metrics, the cash conversion cycle increased from 54 days in Q2 to 106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter. Days sales outstanding increased by 36 days to 85 days versus 49 days in Q2, while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2. Turning to the outlook for Q4 fiscal year 2026, which ends 30 June 2026, we expect net sales in the range of $11 billion to $12.5 billion.

Speaker #2: Turning to the balance sheet and working capital metrics the cash conversion cycle increased from $54 days in Q2 to $106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter; days sales outstanding increased by 36 days to 85 days versus 49 days in Q2 while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2.

Speaker #2: Now turning to the outlook for Q4 fiscal year '26 which ends June 30th, 2026 we expect net sales in the range of $11 billion to $12.5 billion.

Speaker #2: We expect gap diluted net income per share of $53 cents to $67 cents and non-gap diluted net income per share of $65 cents to $79 cents.

David Weigand: We expect GAAP diluted net income per share of $0.53 to $0.67 and non-GAAP diluted net income per share of $0.65 to $0.79. We expect gross margins to be in the range of 8.2% to 8.4% based on expected customer mix. GAAP operating expenses are expected to be around $433 million, which include approximately $114 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q4 of fiscal year 2026 fully diluted GAAP earnings per share includes approximately $95 million in expected stock-based compensation expenses, net of tax effects of $30 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to result in a net expense of approximately $36 million.

Speaker #2: We expect gross margins to be in the range of 8.2 to 8.4% based on expected customer mix. Gap operating expenses are expected to be around $433 million which include approximately $114 million in stock-based compensation expenses that are excluded from non-gap operating expenses.

Speaker #2: The outlook for Q4 of fiscal year 2026 fully diluted gap earnings per share includes approximately $95 million in expected stock-based compensation expenses net of tax effects of $30 million which are excluded from non-gap diluted net income per common share.

Speaker #2: We expect other income and expenses, including interest expense, to result in a net expense of approximately $36 million. The company's projections for Q4 fiscal year '26 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.4%, and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non-GAAP.

David Weigand: The company's projections for Q4 fiscal year 2026 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.4%, and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non-GAAP. Capital expenditures for Q4 are expected to be in the range of $30 to 50 million. For the full fiscal year 2026, we expect net sales to be in the range of $38.9 billion to 40.4 billion. Michael, we're now ready for Q&A.

Speaker #2: Capital expenditures for Q4 are expected to be in the range of $30 to $50 million. For the full fiscal year 2026 we expect net sales to be in the range of $38.9 billion to $40.4 billion.

Speaker #2: Michael, we're now ready for Q&A.

Speaker #1: Great. Hey, before we begin Q&A I'd like to remind everyone that the purpose of this call is to discuss our third quarter fiscal '26 financial results.

Michael Staiger: Great. Before we begin Q&A, I just want to like to remind everyone that the purpose of this call is to discuss our Q3 fiscal 2026 financial results. As such, we ask that you focus your questions on the results we announced today. Thank you in advance, and Krista, let's begin.

Speaker #1: As such we ask that your focus your questions on the results we announce today thank you in advance and Krista let's begin.

Speaker #3: Thank you. If you would like to ask a question please press star one on your telephone keypad to raise your hand and join the queue.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw that question, again, press star one. We kindly ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from Ananda Baruah with Loop Capital. Please go ahead.

Speaker #3: And if you'd like to withdraw that question again press star one. We kindly ask that you limit yourself to one question and one follow-up.

Speaker #3: For any additional questions please read queue. And your first question comes from Ananda Baruha, with Loop Capital. Please go ahead.

Speaker #4: Yeah guys, thanks for taking the question and congrats on the progress with the gross margin. It's great to see that. Yeah, a couple if I could.

Ananda Baruah: Yeah, guys, thanks for taking the question and congrats on the progress with the gross margin. It's great to see that. Yeah, a couple if I could. I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout the year, sort of during the quarter. I guess specifically, could you give us an update on the indictment? Any more insight to any company employee involvement? Do you think you'll have to restate earnings? Are you on track to file your 10-Q, things like that.

Speaker #4: I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout sort of during the quarter I guess specifically could you give us an update on the indictment?

Speaker #4: Any more insight to any company employee involvement you think you'll have to restate earnings? Are you on track to file your 10Q? Things like that.

Speaker #4: And then I guess part and parcel with that on the board investigation that you guys announced if you could talk to the opportunity that that could have to strengthen the organization sort of and what those opportunities might be that would be awesome.

Ananda Baruah: I guess part and parcel with that, on the board investigation that you guys announced, if you could talk to the opportunity that that could have to strengthen the organization, what those opportunities might be, that would be awesome. I have a quick follow-up. Thanks a lot.

Speaker #4: And then I have a quick follow-up. Thanks a lot.

Speaker #1: Okay. Thanks Ananda. So the company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced we're taking this matter seriously.

David Weigand: Thanks, Ananda. The company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced, we're taking this matter seriously. The alleged conduct would violate our export control policies and procedures, and we're fully cooperating with the US government to address this situation. In addition, our independent directors have retained an outside law firm, Munger, Tolles & Olson, and a forensic firm, AlixPartners, to conduct an independent investigation into these events. The investigations are ongoing, and we can't give you any final information at this time. Based on what we know so far, though that could change as the investigation progresses, no one from the company, other than those named in the DOJ indictment, was involved.

Speaker #1: The alleged conduct would violate our export control policies and procedures and we're fully cooperating with the US government to address this situation. In addition our independent directors have retained an outside law firm Munger Tolls and Olson and a forensic firm Alex Partners to conduct an independent investigation into these events.

Speaker #1: The investigations are ongoing and we can't give you any final information at this time. So based on what we know so far though that could change as the investigation progresses no one from the company other than those named in the DOJ indictment was involved.

David Weigand: As to your second question on restatement of earnings, based on everything we know at this moment and considering the independent investigation is ongoing, we do not believe we will need to restate. Lastly, on the 10-Q, again, the independent investigation's ongoing, any filing will be subject to BDO review. Based on what we know at this moment, we are planning to file our 10-Q and are preparing accordingly. I think your last comment about, you know, certainly, we will be taking to heart the results of the independent investigation, we will look at that as an opportunity to grow and strengthen.

Speaker #1: As to your second question on restatement of earnings, based on everything we know at this moment, and considering the independent investigation is ongoing, we do not believe we will need to restate.

Speaker #1: And the lastly on the 10Q again the independent investigation's ongoing and any filing will be subject to BDO review. Based on what we know at this moment we are planning to file our 10Q and are preparing accordingly.

Speaker #1: And I think your last comment about certainly we will be taking to heart the results of the independent investigation and we will look at that as an opportunity to grow and strengthen.

Speaker #4: Thanks for that context. And I guess my follow-up would be sort of dovetailing off of that you guys are probably aware sort of one of the top questions on investors' mind is in lieu of these sort of aforementioned dynamics is there potential for customers to get a little skittish and move away to other server vendors GenAI server vendors.

Ananda Baruah: Thanks for that context. I guess my follow-up would be sort of dovetailing off of that. You guys are probably aware, you know, sort of one of the top questions on investors' minds is, in lieu of these, sort of aforementioned dynamics, you know, is there potential for customers to get, you know, a little skittish and move away to other server vendors, you know, gen AI server vendors? To the degree that you have any context that you could offer there, that would be greatly appreciated. That's it for me. Thanks.

Speaker #4: So, to the degree that you have any context that you could offer there, that would be greatly appreciated. And that's it for me. Thanks.

Speaker #1: Yeah, thank you for the question. Indeed we are growing our customer base like last few quarter I share. Now we have many more large customers and midsize customers.

Charles Liang: Yeah. Thank you for the question. Indeed, we are growing our customer base. Like, last few quarter I share, now we have many more large customer and middle-sized customer. From our experience, working with customer, communicating with customer, most of the customer indeed feel pretty solid to continue our business and continue to grow together. At this moment, I personally don't feel any negative feeling.

Speaker #1: And from our experience working with customers communicate with customers most of the customers indeed feel pretty solid to continue our business and continue to grow together.

Speaker #1: So at this moment I personally don't feel any negative feeling.

Speaker #4: Got it. Thank you for the context. I really appreciate all that. Thanks.

Ananda Baruah: Got it. Thanks. Thank you for the context. I really appreciate all that. Thanks.

Speaker #3: Your next question comes from the line of Samek Chatterjee with JP Morgan. Please go ahead.

Operator: Your next question comes from the line of Samik Chatterjee with JP Morgan. Please go ahead.

MP: Hi. Thank you for taking my question. This is MP on behalf of Samik Chatterjee. For my first one, I just wanted to ask, in your last call, you mentioned DCBBS contributions to profits during H1 of about 4%. Can you please update how did it track during the quarter, and how much of a driver was that relative to gross margin improvement that you saw during the quarter? I have a follow-up.

Manmohanpreet Singh: Hi. Thank you for taking my question. This is MP on behalf of Samik Chatterjee. For my first one, I just wanted to ask, in your last call, you mentioned DCBBS contributions to profits during H1 of about 4%. Can you please update how did it track during the quarter, and how much of a driver was that relative to gross margin improvement that you saw during the quarter? I have a follow-up.

Speaker #5: Hi. Thank you for taking my question. This is MP on behalf of Samek Chatterjee. For my first one I just wanted to ask in your last call you mentioned DCBBS contributions to profits during first half of about 4%.

Speaker #5: Can you please update how did it track during the quarter and how much of a driver was that relative to gross margin improvement that you saw during the quarter?

Speaker #5: And I have a follow-up.

Speaker #1: Yeah. Yeah, very good question. Yeah, our DCBBS indeed continue to gain more and more attraction from our old customers and new customers. So, it's a very good value add to our hardware.

Charles Liang: Yeah, very good question. Our DCBBS indeed continue to gain more and more attraction from our old customer and new customer. It's a very good value add to our hardware and also enhancing our relationship with customer. The customer who use our DCBBS continue to grow, and we believe this growth will continue strongly. In next 2 years, I personally expect at least 20% of our main comp will be from DCBBS, including the management software.

Speaker #1: And also enhancing our relationship with customers. So the customers who use our DCBBS continue to grow, and we believe this growth will continue strongly.

Speaker #1: In the next two years, I personally expect at least 20% of our net income will be from DCBBS, including the management software.

Speaker #5: Okay. Thank you. And then for my follow-up I just wanted to ask on capacity additions which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company?

MP: Okay. Thank you. For my follow-up, I just wanted to ask on capacity additions which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company? Thank you.

Manmohanpreet Singh: Okay. Thank you. For my follow-up, I just wanted to ask on capacity additions which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company? Thank you.

Speaker #5: Thank you.

Speaker #1: Yeah, also very good question. Again our capacity now is very huge. But we continue to grow our capacity because we like to make sure our sales ready for new generation of data center need for our industry.

Charles Liang: Yeah. Very good question. Again, our capacity now is very huge, but we continue to grow our capacity because we like to make sure ourself ready for a new generation of data center need for our industry. For example, a much higher density in power, in computing density, and also in photonics technology and newer generation of switch. We are preparing all of that. And some other new facility indeed was paired with clean room. To make sure we are able to provide exactly the best liquid cooling, the best communication bandwidth, and minimize the power consumption for the new generation data center need. Although our capacity already is big, but we continue to build more capacity.

Speaker #1: For example a much higher density in power in computing density and also in photonics technology. And new generation of switch. So we are preparing all of that.

Speaker #1: And some of the new facility, indeed, was paired with clean room. So to make sure we are able to provide exactly the best liquid cooling, the best communication bandwidth, and minimize the power consumption for the new generation data center need.

Speaker #1: So although our capacity already big but we continue to build more capacity.

Speaker #5: Thank you.

MP: Thank you.

Manmohanpreet Singh: Thank you.

Speaker #1: Thank you.

Charles Liang: Thank you.

Speaker #3: Your next question comes from the line of Victor 2 with Raymond James. Please go ahead.

Operator: Your next question comes from the line of Victor Ku with Raymond James. Please go ahead.

Speaker #6: Hi guys. Thanks for taking the question. I just wanted to follow up on the first question that was asked. Does the investigation around the indictment potentially impact your relationship with NVIDIA?

Victor Ku: Hi, guys. Thanks for taking the question. I just wanted to follow up on the first question that was asked. Does the investigation, you know, that may potentially impact, you know, your relationship with NVIDIA, you know, subsequently, you know, your allocation or supply of GPU and other components? I think that's another really frequent point of concern that we get from clients these days is, you know, how that impacts your relationship and, you know, that's the dynamic there has changed at all.

Victor Chiu: Hi, guys. Thanks for taking the question. I just wanted to follow up on the first question that was asked. Does the investigation, you know, that may potentially impact, you know, your relationship with NVIDIA, you know, subsequently, you know, your allocation or supply of GPU and other components? I think that's another really frequent point of concern that we get from clients these days is, you know, how that impacts your relationship and, you know, that's the dynamic there has changed at all.

Speaker #6: Subsequently, your allocation or supply of GPU and other components—because I think that's another really frequent point of concern that we get from clients these days—is how that impacts your relationship and if the dynamic there has changed at all.

Charles Liang: Our relationship with vendor have been very long time, right? Including NVIDIA, AMD, Intel, Broadcom. At this moment, we feel our partnership stay strong. If not stronger, at least as strong as before. We continue to work together for lots of new projects. We also share with our vendor, it's some a few employees individuals case. I hope they are not impact basically. David, you want to add something here with that?

Speaker #1: Our relationship with vendor has been very long time, right? Including NVIDIA, AMD, Intel, Broadcom. So at this moment we feel our partnership stay strong.

Speaker #1: And if not stronger at least as strong as before. And we continue to work together for a lot of new projects. So we also share with our vendor is some a few employees individuals case so I hope they are not impact basically.

Speaker #1: David, you can add something if you like.

David Weigand: Yeah. I mean, our understanding is that there's been no change in allocation.

Speaker #5: Yeah, I mean our understanding is that there's been no change in allocation.

Victor Ku: Great. That's very helpful. Just a quick follow-up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now and, you know, is that contributing to the margin expansion at this point?

Victor Chiu: Great. That's very helpful. Just a quick follow-up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now and, you know, is that contributing to the margin expansion at this point?

Speaker #6: Okay, that's very helpful. And just a quick follow-up—the investments that you previously noted you made in engineering support and services, have those mostly kind of peaked now, and is that contributing to the margin expansion at this point?

Speaker #5: I'm sorry, could you repeat that?

David Weigand: I'm sorry, could you repeat that?

Victor Ku: The investments that you've noted previously, regarding engineering support services, you know, have those kind of peaked now at this point or, you know, I guess, you know, where are we, you know, along progress of those investments and, you know, how is that contributing to the margin dynamics going forward?

Victor Chiu: The investments that you've noted previously, regarding engineering support services, you know, have those kind of peaked now at this point or, you know, I guess, you know, where are we, you know, along progress of those investments and, you know, how is that contributing to the margin dynamics going forward?

Speaker #6: The investments that you've noted previously regarding engineering support services have those kind of peaked now at this point or I guess where are we along progress of those investments and how is that contributing to the margin dynamics going forward?

Charles Liang: Oh, yeah. I mean, a very good question. Indeed, our service business, including data center planning, designing or deploying or out of view of service continue to grow. We continue to grow that service team, consulting team, and the revenue continue to grow. Yes. In this segment, the profit is much better than our average hardware for sure.

Speaker #1: Oh, yeah. I mean, a very good question. Indeed, our service business—including data center planning, designing, or deploying, or how to build our service—continues to grow.

Speaker #1: So we continue to grow that service team consulting team and revenue continue to grow is in this segment of profit is much better than our average hardware for sure.

David Weigand: I would say there is in no ways has peaked. I mean, it's really we're just gaining traction.

Speaker #5: Yeah, but I would say in no ways has peaked. So I mean it's really we're just gaining traction.

David Weigand: I would say there is in no ways has peaked. I mean, it's really we're just gaining traction.

Victor Ku: Okay. Thank you.

Victor Chiu: Okay. Thank you.

Speaker #6: Okay. Thank you.

Operator: Your next question comes from the line of Atif Malik with Citi. Please go ahead.

Operator: Your next question comes from the line of Asiya Merchant with Citi. Please go ahead.

Speaker #3: Your next question comes from the line of Asia Merchant with Citi. Please go ahead.

Atif Malik: Oh, great. Thanks for taking my question here. If I could on just the supply constraints, there's been a lot of talk about, you know, CPU-based shortages. Just the guide that you're providing, are you constrained in any components here? Would there be a number, you know, if these supply issues were resolved, basically, were you constrained by supply? If I can squeeze in one more as well on the data center. Clearly, you're seeing traction here. You know, relative to where you were last quarter when it was just starting to kick through, can you help us understand what kind of customers, if you're seeing any change in the customers, you know, whether it's from a vertical perspective or a geographic perspective, where you're seeing traction with these Data Center Building Block Solutions? Thank you.

Asiya Merchant: Oh, great. Thanks for taking my question here. If I could on just the supply constraints, there's been a lot of talk about, you know, CPU-based shortages. Just the guide that you're providing, are you constrained in any components here? Would there be a number, you know, if these supply issues were resolved, basically, were you constrained by supply? If I can squeeze in one more as well on the data center. Clearly, you're seeing traction here. You know, relative to where you were last quarter when it was just starting to kick through, can you help us understand what kind of customers, if you're seeing any change in the customers, you know, whether it's from a vertical perspective or a geographic perspective, where you're seeing traction with these Data Center Building Block Solutions? Thank you.

Speaker #4: Oh, great. Thanks for taking my question here. If I could just—the supply constraints. There's been a lot of talk about CPU-based shortages, so just the guide that you're providing—are you constrained in any components here?

Speaker #4: And would there be a number if the supply issues were resolved? Basically were you constrained by supply? And then if I can squeeze in one more as well on the data center clearly you're seeing traction here.

Speaker #4: Relative to where you were last quarter, when it was just starting to kick through, can you help us understand what kind of customers—if you're seeing any change in the customers—whether it's from a vertical perspective or a geography perspective, where you're seeing traction with these data center building block solutions?

Speaker #4: Thank you.

Charles Liang: Yeah. Thank you. Yeah. In terms of shortage, I believe it's a global, common problem. In last 6 months, as you know, on the memory, SSD price grow so much, double, triple, more than triple, and some CPU shortage, especially from Intel. Also even some GPU shortage, right? We, like other competitor, other system company, yes, we suffer a lot from those shortage. Those shortage may continue for, we don't know how long, like memory and SSD. We have a very good relationship with our vendor, so we continue to work with them and try to gain more long-term support. As to our customer base, yes, as what I share last time, we start to gain more, many more Enterprise customer, globally and NeoCloud.

Speaker #1: Yeah, thank you. Yeah, in terms of shortage I believe as a global common problem. So in last six months as you know on the memory SSD price grow so much double, triple more than triple and some CPU shortage especially from Intel.

Speaker #1: So, and also even some GPU shortage, right? So we, like other competitor, other system company, yes, we suffer a lot from those shortage. And those shortage may continue for—we don't know how long.

Speaker #1: Like memory and SSD. But we have a very good relationship with our vendor, so we continue to work with them and try to get more long-term support.

Speaker #1: As to our customer base, yes, as well, I shared last time we start to gain more—many more—enterprise customers globally. And Neo Cloud, so we add more large customers and we add lots of mid-size and small-size customers.

Charles Liang: We add more large customer, and we add lots of mid-size and small-size customer, and we will continue this direction to support more customer. Great. Thank you. Thank you.

Charles Liang: We add more large customer, and we add lots of mid-size and small-size customer, and we will continue this direction to support more customer.

Speaker #1: And we will continue this direction. To support more customers.

Asiya Merchant: Great. Thank you.

Speaker #4: Great. Thank you.

Speaker #1: Thank you.

Charles Liang: Thank you.

Operator: Your next question comes from the line of Katherine Murphy with Goldman Sachs. Please go ahead.

Speaker #3: Your next question comes from the line of Catherine Murphy with Goldman Sachs. Please go ahead.

Katherine Murphy: Thank you for the question. I was wondering if there was any one-time items that impacted gross margins in the quarter, and anything you could share there specifically to quantify. I think you mentioned tariffs, expedite fees, and inventory reserve charges, that would be helpful. I have a quick follow-up. Thank you.

Speaker #7: Thank you for the question. I was wondering if there was any one-time items that impacted gross margins in the quarter and anything you could share there specifically to quantify?

Speaker #7: I think you mentioned tariffs, expedite fees, and then inventory reserve charges. That would be helpful. And then I have a quick follow-up. Thank you.

Speaker #5: Sure. So with the tariffs as you know we're reduced by the Supreme Court. And there were some replacement tariffs that came in. So we are hopeful that tariffs will be down net on a net basis going forward.

David Weigand: Sure. With the tariffs, you know, were reduced by the Supreme Court. There were some replacement tariffs that came in. We are hopeful that tariffs will be down net, on a net basis, you know, going forward. Whether I look at that as a temporary or ongoing thing is based on optimism. The other thing regarding expedite fees, we had a very large deployment in our Q3, which I'm sorry, in our Q2, which ended up incurring a lot of expedite charges. Those did not recur in the Q3.

Speaker #5: So whether I look at that as a temporary or ongoing thing is based on optimism. But the other thing regarding expedite fees we had a very large deployment in our March quarter which I'm sorry in our December quarter which ended up incurring a lot of expedite charges.

Speaker #5: So we did those did not recur in the March quarter. So therefore we expect that to be incrementally up going forward. As to the supply constraints as Charles mentioned were it was especially troublesome in the last six months but we expect some challenge going forward but not like we incurred over the last six months.

David Weigand: We expect that to be incrementally up going forward. As to the, you know, the supply constraints, you know, as Charles mentioned, it was especially troublesome in the last six months. We, you know, we expect some challenge going forward, but not like we incurred over the last six months.

Speaker #7: That was very helpful. And then in terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness—and that deal was contemplated in your prior guidance for a margin benefit that was modest quarter over quarter.

Katherine Murphy: That was very helpful. In terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness, and that deal was contemplated in your prior guidance for a margin benefit that was modest quarter-over-quarter. Was that deal that flipped or was otherwise delayed a drag on consolidated gross margins? How should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here?

Speaker #7: Was that deal that flipped or was otherwise delayed a drag on consolidated gross margins and how should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here?

David Weigand: Yeah. We think that some of the large deals that we talked about in the past have been incrementally beneficial to Super Micro because of our reputation, the reputation that it brings for us in deploying large scale installations to some of the best sites in the world. What we notice now is that we're, as Charles mentioned, we're not only getting more, larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales. We're actually, we actually had more diversification this quarter, and we see that going into the current, you know, into the June quarter as well.

Speaker #5: Yeah. So we think that some of the large deals that we talked about in the past have been incrementally beneficial to super micro because of our reputation.

Speaker #5: The reputation that it brings for us in deploying large-scale installations to some of the best sites in the world. And so what we noticed now is that, as Charles mentioned, we're not only getting more larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales.

Speaker #5: And so we're actually we actually had more diversification this quarter and we see that going into the current into the June quarter as well.

Speaker #5: So we think on a net basis some of the strategic decisions that we made on large installations have been beneficial.

David Weigand: We think on net basis, some of the strategic decisions that we made on large installations have been beneficial.

Speaker #7: Thank you.

Katherine Murphy: Thank you.

Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.

Speaker #3: Your next question comes from the line of RouteBlue about Ataria with Bank of America. Please go ahead.

Ruplu Bhattacharya: Hi. Thanks for taking my questions. I've got two. The first one is a clarification on revenues and gross margins. David, you mentioned that there was some push-out of revenue into future quarters. Can you help us quantify how much of that is coming back in the December quarter versus how much will be in future quarters? On the margin side, can you help us clarify how you're thinking about the margin decline from fiscal Q3 to fiscal Q4? I think you guided 8.3% gross margin on higher $11.8 billion of revenue. What are some of the factors impacting gross margins between fiscal Q3 and Q4? I have a follow-up.

Speaker #8: Hi. Thanks for taking my questions. I've got two the first one is a clarification on revenues and gross margins. David you mentioned that there was some push out of revenue into future quarters.

Speaker #8: Can you help us quantify how much of that is coming back in in the December quarter versus how much would be in future quarters?

Speaker #8: And on the margin side can you help us clarify how you're thinking about the margin decline from fiscal three Q to fiscal four Q?

Speaker #8: I think you guided 8.3% gross margin on higher 11.8 billion of revenue. So what are some of the factors impacting gross margins between fiscal three Q and four Q?

Speaker #8: And I have a follow-up.

Speaker #5: Sure. So regarding the deferred revenue it really comes down to when the customers are ready and when their data centers are ready RouteBlue. So we're always optimistic that we can that we can ship right away.

David Weigand: Sure. Regarding the deferred revenue, it really comes down to, you know, when the customers are ready and when their data centers are ready, Ruplu. You know, we're always optimistic that we can ship right away, but that sometimes depends on the customer readiness. We have to wait and see, you know, if, you know, how much lands in the Q2 and how much lands in the Q3. As to margins, our margin mix is determined by, you know, which customers that we sell to and which products we sell. That's really the biggest dynamic in affecting our margins.

Speaker #5: But that sometimes depends on the customer readiness. So we have to wait and see if how much lands in the June quarter and how much lands in the September quarter.

Speaker #5: As to margins the our margin mix is determined by which customers that we sell to and which products we sell. So that's really the biggest dynamic in affecting our margins.

David Weigand: What we, you know, so therefore what we see is a good upward trend, you know, to that 8.2 to 8.4 range. But it will depend on which customers ultimately we sell to.

Speaker #5: But what we so therefore what we see is a good upward trend to that 8.2 to 8.4 range but it will depend on which customers ultimately we sell to.

David Weigand: What we, you know, so therefore what we see is a good upward trend, you know, to that 8.2 to 8.4 range. But it will depend on which customers ultimately we sell to.

Ruplu Bhattacharya: Got it. Thanks for the details there. Can I ask a follow-up on working capital? In the past, when we've had GPU transitions, you've had to spend some working capital and time and money as customers qualify these new racks. I'm thinking as NVIDIA releases new GPUs and when the transition happens from the Oberon rack to a new Kyber rack, how are you thinking about your working capital needs, and is there a chance that you might have to come to the capital markets again to raise capital for working capital? Just your thoughts on investments required as new GPUs and new rack designs come out. Thank you.

Speaker #8: Got it. Thanks for the details there. Can I ask a follow-up on working capital? In the past when we've had GPU transitions you've had to spend some working capital and time and money as customers qualify these new racks.

Speaker #8: So I'm thinking as NVIDIA releases new GPUs and when the transition happens from the Oberon rack to a new Kyber rack how are you thinking about your working capital needs and is there a chance that you might have to come to the capital markets again to raise capital for working capital?

Speaker #8: So just your thoughts on investments required as new GPUs and new rack designs come out. Thank you.

Charles Liang: Yeah, very good question. Basically, we are diversify our customer base, and also, improving our Total value. Now we have more and more partnership that we not just build a AI server, not just the storage, but we have customer deployment and build a whole data center with DC BBS total solution. Indeed our business will be more diversified and more kind of smooth slide in term of our revenue dynamic and also profit margin change. In term of those concern, we are improving in a very positive direction now, quarter after quarter, basically.

Speaker #5: Yeah. Very good question. Basically we are diversifying our customer base. And also improving our product value. Now we have more and more partnership that we not just build AI server not just storage but we have customer deployment and build a whole data center with DCPBS total solution.

Speaker #5: So indeed our business will be more diversified and more kind of smooth slice in terms of revenue dynamic and also profit margin change. So in terms of those concerns we are improving in a very positive direction now quarter after quarter basically.

Ruplu Bhattacharya: Okay. In terms of working capital, David, any thoughts there?

Speaker #8: Okay. And in terms of working capital? David any thoughts there?

Speaker #5: Yeah. So RouteBlue what I would say is I always hope that we need to go back to the markets for more money because that means.

David Weigand: Yeah. Ruplu, what I would say is I always hope that we need to go back to the markets for more, for more money.

Charles Liang: If we grow a lot.

Speaker #8: If we grow a lot.

David Weigand: Yeah, yeah. That's.

Speaker #5: Yeah. Yeah.

Charles Liang: If we grow, more stably, our capital should be pretty enough. It depends.

Speaker #8: But if we grow more stably, our capital should be pretty enough. So, it depends.

Charles Liang: If we grow, more stably, our capital should be pretty enough. It depends.

David Weigand: It depends on how fast our growth rate is, Ruplu.

Speaker #5: It depends on how fast our growth rate is RouteBlue.

Charles Liang: Yeah. We, if we try to double again revenue, then we may need some more help in terms of capital. If we grow a little bit humble, then I believe we are pretty enough. Now our business model is improving. Yeah.

Speaker #8: Yeah. If we try to double again revenue then we may need some more help. In terms of capital. But if we grow a little bit humble then I believe we are pretty enough.

Speaker #8: Because now our business model is improving. Yeah.

Operator: Your next question comes from the line of Nehal Chokshi with Northland Capital Markets. Please go ahead.

Speaker #3: Your next question comes from the line of Nihal Chokshy with Northland Capital Markets. Please go ahead.

Nehal Chokshi: Hey, thank you, and congratulations on the strong gross margin. Charles, you mentioned that over the next 2 years, targeting 20% the Data Center Building Block Solutions 20%. Was that gross profit or was that revenue?

Speaker #9: Hey. Thank you and congratulations on the strong gross margin. Charles you mentioned that over the next two years targeting 20%. Did that center building block solutions 20%?

Speaker #9: Was that gross profit, or was that revenue?

Charles Liang: Profit.

Speaker #5: Coffee.

Nehal Chokshi: Got it. Okay. Very good. I can't remember, David or Charles, you gave a percentage or a dollar number of DC BBS in the quarter ago period. Could you just repeat that again real quickly?

Speaker #9: Got it. Okay. Very good. And I can't remember—David or Charles, you gave a percentage or a dollar number of DCPBS in the quarter and the quarter-ago period.

Speaker #9: Could you just repeat that again real quickly?

David Weigand: We didn't give that percentage out, Nihal. Our gross margin did increase on our data center sales. I don't have the percentage of our gross profit that that represented.

Speaker #5: We didn't give that percentage out, Nihal. But our gross margin did increase on our data center sales, but I don't have the percentage of our gross profit that that represented.

David Weigand: We didn't give that percentage out, Nihal. Our gross margin did increase on our data center sales. I don't have the percentage of our gross profit that that represented.

Charles Liang: Yeah. When the DCBBS

Speaker #8: Yeah. When DCPBS percentage continue to grow we may quickly provide that kind of percentage change.

Nehal Chokshi: Okay

Charles Liang: percentage continue to grow, we may quickly provide the kind of percentage change.

Nehal Chokshi: Okay. Thinking about the significant improvement in gross margin, would you bucket that more towards DCBBS ramp or more towards a reduction in your 10% customer going from 63% to 27% in that from the December to March quarter?

Speaker #9: Okay. And so thinking about the significant improvement in gross margin would you look at that more towards DCPBS ramp or more towards a reduction in your 10% customer going from 63% to 27% in that from the December to March quarter?

Speaker #5: Yeah. I guess there are two factors. It will continue to improve our gross margins. One is the DCPBS solution. With that segment, our profit margin most of the time is more than 20%.

Charles Liang: Yeah. I guess there are two factors we are continue to improve our gross margins. One is DCBBS solution. With that segment, our profit margin be the most of the time are more than 10%. The other segment is enterprise customer focus. We start to grow many more enterprise customer, and we will continue that direction. That will improve our gross margin and net margin as well.

Speaker #5: And the other segment is enterprise customer focus. We start to grow minimal enterprise customer and we will continue that direction. So that will improve our gross margin and net margin as well.

Nehal Chokshi: Okay. Then included in the guidance is the expectation that this customer that is 27% of revenue in the current quarter will continue to be a 10 plus percent customer?

Speaker #9: Okay. And then included in the guidance is the expectation that this customer does 27% of revenue in the current quarter will continue to be a 10 plus percent customer?

Charles Liang: Yes. We will have a many more, NeoCloud, kind of a mid-sized cloud customer and even small-sized cloud customer. For sure we will continue support a large cloud customer as well. More NeoCloud, small cloud, enterprise cloud. Overall, our margin will continue to improve.

Speaker #5: Yes. We will have a minimal new cloud kind of midsize cloud customer and even small size cloud customer. And for sure we will continue support a large cloud customer as well.

Speaker #5: But more new cloud, small cloud, enterprise cloud. So overall, our margin will continue to improve.

Operator: Your next question comes from the line of Quinn Bolton with Needham & Company. Please go ahead.

Speaker #3: Your next question comes from the line of Quinn Bolton with Niedemann Company. Please go ahead.

Neil Young: This is Neil Young on for Quinn Bolton. Thank you for letting me ask a question. I was hoping you could touch on maybe you did a little bit, but maybe touch on what drove the strong quarter-over-quarter increase in enterprise. You know, are you expecting to see healthy growth from enterprise again here in the next Q and through fiscal year 2027? You know, should we think about the revenue split by channel more closely reflected in Q2? I have a follow-up. Thank you.

Speaker #10: Hey. This is Neil Young. I'm for Quinn Bolton. Thank you for letting me ask a question. So I was hoping you could touch on maybe what Charles you did a little bit but maybe touch on what drove the strong quarter over quarter increase in enterprise and then are you expecting to see healthy growth from enterprise again here in the next quarter and through fiscal year '27 or should we think about the revenue split by channel more closely reflected in two Q?

Speaker #10: And then I have a follow-up. Thank you.

Charles Liang: Yeah. We don't provide the detail. The direction is there very strongly. I mean, improve many more enterprise customer, and we see lots of customer really like to work with us. At the same time, the DCBBS help us to engage with more and more NeoCloud and enterprise AI data center customer. Long term, we feel pretty comfortable in this direction.

Speaker #5: Yeah. We don't provide a detail, but the direction is there—very strongly. I mean, improve minimal enterprise customer, and we see lots of customers really like to work with us.

Speaker #5: And then at the same time DCPBS help us to engage with more and more new cloud and enterprise AI data center customer. So long term we feel pretty comfortable in this direction.

Speaker #10: Okay. Thanks. That's helpful. And then just wanted to go back to gross margin one last time. Do you help us think about sort of what level is sustainable as we do look into fiscal year '27 as it seems like large AI deployments will most likely trend towards being a bigger mix of revenue in the coming quarters?

Neil Young: Okay, thanks. That's helpful. Then, just wanted to go back to gross margin one last time. Do you have a think about sort of what level is sustainable, you know, as we do look into fiscal year 2027 as, it seems like large AI deployments will most likely, you know, trend towards being a bigger mix of revenue in the coming quarters? Thanks.

Speaker #10: Thanks.

Charles Liang: Yeah. We believe we are continuing to grow in a very healthy way because we are growing customer base, we are growing a product line, we are growing a total solution, including software and service. We are getting to a much mature, much high value partner to the market.

Speaker #5: Yeah. We believe we will continue our growth in a very healthy way because we are growing customer base. We are growing product line. We are growing total solution including software and service.

Speaker #5: So, we are getting to a much more mature, much higher-value partner to the market.

Operator: Your next question comes from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Speaker #3: Your next question comes from the line of John 10110 with CJS Securities. Please go ahead.

Jon Tanwanteng: Hi. Thank you for taking my questions, really nice quarter. I was wondering if you could just address a little more on the export violation issue and if that might impact your ability to finance growth or the cost to finance growth going forward. I don't know if you talked about the cost of remediation or addressing the violations, preventing them from happening again, but if you could help disclose that would be helpful as well.

Speaker #9: Hi, thank you for taking my questions, and really nice quarter. I was wondering if you could just address a little bit more on the export violation issue and if that might impact your ability to finance growth, or the cost to finance growth, going forward.

Speaker #9: And I don't know if you talked about the cost of remediation or addressing the violations, and preventing them from happening again, but if you could help disclose that, that would be helpful as well.

Speaker #10: Yeah, John. I think I'll go back to the comments that I made earlier, that we, the company, was not named in this, and so therefore we take these things very seriously.

David Weigand: Yeah. Jon, I think I'll go back to the, you know, the comments that I made earlier that, you know, that, you know, we the company was not named in this. Therefore, we, you know, we take these things very seriously. We're conducting our own internal investigation, as you know, and I won't, I don't want to add any more to that.

Speaker #10: But we’re conducting our own internal investigation, as you know, and I don’t want to add any more to that.

Charles Liang: And also-

Speaker #8: And also, kind of based on what we know so far—though that could change as the investigation progresses—no one from the company, other than those named in the DOJ indictment, was involved.

Jon Tanwanteng: Okay

Charles Liang: kind of, based on what we know so far, though that could be a change as the investigation progresses. No one from the company other than that those named in the DOJ indictment was involved. We have a very good confidence with our integrity.

Speaker #8: So we have a very good confidence with our integrity.

Jon Tanwanteng: Perfect. Thank you. I have a follow-up, if I could. You mentioned record or backlog and strong orders. I was wondering what that indicates heading into the H2 of this calendar year, just from a growth perspective, number one, and number two, if the supply environment can support growth over the H1.

Speaker #9: Perfect, thank you. And then I have a follow-up, if I could. You mentioned record backlog and strong orders, and I was wondering what that indicates heading into the back half of this calendar year.

Speaker #9: Just from a growth perspective, number one, and number two, if the supply environment can support growth over the first half.

Speaker #10: Yeah. Basically we are faster growing company as you know. So we can grow much faster if we accept the margin business. So we try to be balanced in between the growth and the gross margin and net margin.

Charles Liang: Yeah. Basically, we are a faster growing company, as you know. We can grow much faster if we accept the whole margin business. We try to be a balance in between the growth and the gross margin and net margin. Basically, we are in good shape. I would also say we can control and decide the ratio, the balance.

Speaker #10: So basically, we are in good shape. I would like to say we can control and decide the ratio, the balance.

Jon Tanwanteng: Great. Thank you for that.

Speaker #9: Great. Thank you for that.

Speaker #10: Thank you.

Charles Liang: Thank you.

Operator: Your final question comes from the line of Mark Newman with Bernstein. Please go ahead.

Speaker #3: Your final question comes from the line of Mark Newman with Bernstein. Please go ahead.

Speaker #10: Thanks for squeezing me in and congrats on the gross margin. On the gross margin and the mix it sounds like that's the gross margin rebound is driven partly by some of these what do you call it expedition charges reducing but also sounds like if I get it right the enterprise mix is also helping.

Mark Newman: Thanks for squeezing me in. Congrats on the gross margin. On the gross margin and the mix, it sounds like that's the gross margin rebound is driven partly by some of these what do you call, expedition charges are reducing. Also sounds like, if I get it right, the enterprise mix is also helping. I wanted to ask just to clarify if that's right. Within enterprise, is that AI server or is this more traditional server? I have another question also on the revenue as well. Thanks.

Speaker #10: I wanted to ask just to clarify if that's right and within enterprise is that AI server or is this more traditional server? I have another question also on the revenue as well.

Speaker #10: Thanks.

Charles Liang: Indeed both, kind of for AI enterprise, I mean, a lot of generative AI kind of invention application. We see a very strong demand there. For traditional server and storage, even IoT, we also start to gradually support and expand this market, and we see a very good progress. We are continuing overall enterprise business.

Speaker #5: Indeed both. Kind of for AI enterprise I mean lots of genetic AI kind of influencing application. So we see a very strong demand there.

Speaker #5: And for traditional server and storage even IoT we also start to gradually support and expand this market. And we see a very good progress.

Speaker #5: So we will continue overall enterprise business.

Mark Newman: Okay. Great. On the, on the revenue, it sounds like the reasons for the slightly light revenue was this 63% customer last quarter, now pushed out a little bit, which is, I believe, the 27% customer. As that customer comes back, presumably if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the, in the coming quarters? Also, just one more quick question. You mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time.

Speaker #10: Okay, great. And then on the revenue, it sounds like the reason for the slightly light revenue was this 63% customer last quarter now pushed out a little bit, which is, I believe, the 27% customer. As that customer comes back, presumably if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the coming quarters?

Speaker #10: And also, just one more quick question—you mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time.

David Weigand: We don't give out our backlog number. We just make general comments about the fact that it's very strong. We are as I mentioned earlier, we've diversified our pipeline extensively. We have a, as Charles mentioned, we have a number of large deals from new, you know, new clouds and cloud service providers, which we are expecting to increase both our, you know, our footprint, our customer diversity, as well as our margins, along with our DCBBS and enterprise expansion.

Speaker #5: Yeah, so we don't give out our backlog number, so we just make general comments about the fact that it's very strong. But we are, as I mentioned earlier, we've diversified our pipeline extensively, and so, as Charles mentioned, we have a number of large deals from new NeoClouds and cloud service providers, which we are expecting to increase both our footprint, our customer diversity, as well as our margins.

Speaker #5: Along with our DCBBS and enterprise expansion.

Mark Newman: Okay. Thank you very much.

Speaker #10: Okay. Thanks very much.

Operator: Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you all for your participation. You may now disconnect.