Good morning. My name is Devin and I will be your conference operator today. At this time I would like to welcome everyone to the Super Micro Computer, Inc. Fiscal Q2 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you for your patience. Mr. Michael Staiger, you may begin your conference.

Good afternoon and thank you for attending Supermicro’s call to discuss financial results for the second quarter, which ended December 31, 2022. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer, and David Weigand, Chief Financial Officer. By now, you should have received a copy of the news release from the Company that was distributed at the close of regular trading and is available on the Company’s website. As a reminder, during today’s call, the Company will refer to a presentation that is available to participants in the Investor Relations section of the Company’s website under the Events & Presentations tab. We’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, and future business outlook, including guidance for the third quarter of fiscal 2023 and the full fiscal year 2023. There are a number of risk factors that could cause Supermicro’s future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2022, and other SEC filings. All of these documents are available on the Investor Relations page of Supermicro’s website. We assume no obligation to update any forward-looking statements. Most of today’s presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today’s press release and in the supplemental information attached to today’s presentation. At the end of today’s prepared remarks, we will have a Q&A session for sell-side analysts to ask questions. And I’ll now turn the call over to Charles.

Thank you, Michael, and good afternoon, everyone. Today, I am pleased to announce another outstanding quarterly result for Supermicro, driven by contributions across our diversified customers, end markets and strong products. No single customer contributed more than 10% of our revenue. This is the eighth consecutive quarter of outstanding growth that effectively doubled our annual revenue. Let me share some key highlights for the quarter. First, revenue for the second quarter of fiscal year 2023 totaled $1.803 billion, up 54% year-on-year, above our guidance range of $1.7 billion to $1.8 billion. Our fiscal second quarter non-GAAP earnings per share grew over 271% year-on-year at $3.26 compared to $0.88 a year ago, far exceeding the high end of our guidance range of $2.64 to $2.90. This great achievement is made possible by our much-improved operational and financial discipline, including our Taiwan campus that contributed lower operation and production cost. With the increase of AI applications, our Plug-n-Play Rack-Scale Total IT solutions and GPU based systems continue to be strong contributors with more than 100% year-on year growth. Storage products are also gaining significant traction with 41% year-over-year growth as we continued to grow market share. We are mindful that many of our partners and customers have become increasingly more cautious with respect to macroeconomic headwind, and we are prepared to deal with these uncertainties as we always have in the past. The strength of our products and business fundamentals keeps us confident in our ability to continue gaining market share from competition given in the traditionally soft Q3 quarter. We expect the headwind may persist in the first half of calendar 2023, but we believe our business will recover quickly in the second half of the year as our new Sapphire Rapids, Genoa product and H100 product lines start to ramp…

Thank you, Charles. I am pleased to report Q2 fiscal 2023 revenues of $1.8 billion, up 54% year-on-year and down 3% sequentially. Revenues were at the high end of our initial guidance range of $1.7 billion to $1.8 billion and our recently updated range of $1.77 billion to $1.8 billion. Our year-over-year revenue growth continued to be driven by new and existing customers widely adopting our GPU/AI systems and rack-scale Total IT Solutions which contributed to solid gross margins and record operating margins. In fiscal Q2, we had good growth in our two largest verticals: enterprise/channel and OEM vertical -- I’m sorry, the enterprise/channel vertical and the OEM appliance/large datacenter vertical, which demonstrated the resilience of our business model. AI/GPU accelerated computing solutions represented more than 20% of our revenues over the past four quarters and is a significant growth opportunity based on our wide range of AI/GPU platforms. We achieved Q2 revenues of $1.8 billion with no customer representing more than 10% of revenues. We recorded $970 million in our Enterprise and Channel vertical, representing 54% of Q2 revenues versus 45% last quarter, up 29% year-over-year and up 15% quarter-over-quarter. The OEM appliance and large datacenter vertical achieved $766 million in revenues, representing 42% of Q2 revenues versus 50% last quarter, this was up 172% year-over-year and down 17% quarter-over-quarter. Our emerging 5G/Telco/Edge/IoT segment achieved $67 million in revenues, representing 4% of Q2 revenues versus 5% last quarter. Systems comprised 92% of total revenue and was up 68% year-over-year and down 3% quarter-over-quarter. Subsystems/accessories represented 8% of Q2 revenues and were down 24% year-over-year and up 2% quarter-over-quarter. On a year-over-year basis, the volume of systems and nodes shipped as well as System node ASPs increased due to product and customer mix, while on a quarter-over-quarter basis, the volume…

[Operator Instructions] Our first question comes from Nehal Chokshi with Northland Capital Markets.

Yes. Thank you. And congratulations on the strong results, especially gross margin, and the guidance that implies very resilient gross margin. Dave, you did mention that you’re expecting 30 basis points of the Q-over-Q downtick due to macro pressures. I mean, that’s a de minimis amount. Can you discuss why only that amount?

Well, Nehal, our margins are holding up. We expected a downtick last -- in this Q2, but it didn’t happen. We’re still allowing for a downtick just in case we have to sharpen our pencil on some particular deals. But otherwise our prices and margins are holding up.

So then, can you talk about why you think your margins are indeed holding up in what appears to be pretty quickly deteriorating macro environment?

Well, we have customers that are -- that have pushed out orders, certainly Nehal, but that we still bring value to our customers. And that value is -- has not diminished. And, in fact, with all of the new designs that are coming out, we believe it’s increased.

Got it. That’s great. And then, you’re maintaining your fiscal year ‘23 guidance despite outperformance in the December quarter and you’re providing at least March guidance that’s above my expectations. So, how should we be reading that implied June Q guidance, basically? Should we be -- if we take at the low end of the fiscal year ‘23 guidance, you could be looking at a pretty dire gross margin situation within June Q, is that the correct interpretation?

No, I would say Nehal that really we are -- we don’t want to update our guidance. We’re confident in our guidance and in the ranges that we’ve given. And so really we’re just -- we’re watching the macroeconomic situation. But we remain confident in our basic business fundamentals and in our values -- the values that our products bring.

Okay. So just to be clear, there is no reasonable basis for believing that gross margin would drop to the low-end of your what’s arguably a sale target model of 14% to 17% in the June quarter, or lower, is that correct?

So we -- right now, we don’t see any degradation of our gross margins, as I mentioned. And so -- but we feel like -- we remain confident in our in our ranges. And we don’t believe this is a time to update them.

And then, Charles made a comment that he expects fiscal year ‘23 revenue be taking at least 30% year-over-year growth or mid-30%. But your overall fiscal year ‘23 guidance range is still a pretty large bracket. So, how should we be reconciling these two things here?

Well, I think that number of mid-30s, that still falls within the range. Right, Nehal?

Absolutely.

Yes. So I think that’s an indication.

Our next question comes from Ananda Baruah with Loop Capital.

Yes, just a few if I could. So, maintaining -- actually, I think, slightly raising the midpoint of the fiscal year guide, March is below where Street is, the implication is June is above where Street is. And so, is it really just a matter of, kind of Street, like we are -- and I think I’m part of this, sort of had miss-modeled March to the low side? And subsequently, we’re also miss-modeling June? Well, we miss-modeled March to the high side, and we’re miss-modeling June to the low side? Just a clarification. Just your thoughts on that and I have a couple of follow-ups. Thanks.

Sure. So again, I’ll kind of go back and we’re -- because things have been changing economically and we had some -- we’ve seen some push-outs, not cancellations, again, push-outs, we feel like, we shouldn’t be adding more details on Q4 or annual guidance. And so, really, we feel like the guidance ranges that we gave allow for where we think performance will land. And so, to give more specificity to that, at a time when details are not easy to -- are not as clear to see, we think is the wrong way to go. And so instead, we’re giving good guidance on what we see in the quarter ahead. But again, we’re still comfortable with our annual guidance.

And it sounded -- I think, I believe Charles mentioned, and actually just please clarify this for me if this is inaccurate, something about kind of macro software, but recovery in the second half of calendar year ‘23. And if I heard that accurately, is that to say, you guys envision the first half of the calendar year being sort of the softest part of macro for you? And you also made comments Dave about returning calendar ‘23 to seasonality. And so first half is the soft spot, second half, you guys think sort of normal seasonality plus quote unquote, recovery begins and that dovetails into your fiscal year ‘24 outlook? And so contextually, I just want to ask you, is that how you guys are thinking about it?

Yes. Macroeconomic headwind issue is some concern to everyone now. So other than that, indeed, our demand is still pretty strong, especially as you know, Intel just announced Sapphire Rapids; AMD, Genoa; and NVIDIA, Hopper, H100. So we have very strong products available. And this time, we saw a customer very aggressively asking was simple for early seeding. So, we believe these were put in big growth. And -- however the very big growth in model should be in about summer or even after summer timeframe. So long-term, we have a very strong confidence, especially after summer. Before summer, depends on macroeconomic headwinds. We try to be more cautious.

Very helpful, Charles. And, Charles, last for me, I believe you mentioned potential for more large data centers in the second half of calendar ‘23. Did I hear that accurately? And are those incremental data centers, if I heard it accurately? And any more context you could provide around that? Thanks.

Yes. I mean, as you know, we start to approach large accounts since maybe one year ago. So, we continue to gain interest from those CSP and larger accounts. And that’s why we increased having capacity for lower production cost to support those larger accounts. And we even started a big campus in Malaysia. So, the goal is to increase our production capacity and lower our operation and production costs, so that we are able to support those larger accounts with reasonable profitability. So, we continue to gain some engagement and interest from larger accounts around the world. And also at the same time, we also started to engage with lots of mini size accounts, especially those through B2B and B2C. So, we are engaging with much broader customer base now.

Our next question comes from Mehdi Hosseini with SIG.

Couple of follow-ups. It seems like the price decline in the December quarter has more to do with the mix. And I am assuming that the OEM and large data center mix went down from 15, September to 42% in December. And in that context, my question to you is how should I think of the mix in the March quarter, and how will that impact unit and ASP trends?

In March quarter, because of the market headwind, so we still tried to be cautious. But after summer, our feeling become much stronger, because a lot of good products, lots of engagement from larger accounts, middle sized account and even small -- a lot of small accounts.

So, Charles, I just want to understand, would the mix of revenue from OEM and large data center decline again in the March quarter?

Yes. I would say. Yes.

And then, I also want to understand how you see the ramp of these three different CPUs. You have always -- you’ve historically been a close partner of Intel, AMD and NVIDIA. How long in advance do you actually procure those components in advance of building the boxes? How much of the inventory commitment or working capital commitment do you have to make before the actual high volume manufacturing takes place?

Indeed we have a very close partnership with all of our vendors. So, in this area, I believe we are similar to the industry standard or slightly better. David, you may…

Yes. Many things have improved recently, as you know, on the supply chain side. So, we used to procure further in advance. And so one of the reasons our inventories have come down, one of the reasons our cash flows have been -- have increased. And by the way, we had net income the last two quarters of $360 million, we had free cash flow of $454 million. And so, again, the reason for that is we had to invest less money in inventory. So, our ability to produce products is faster now, because we can buy later in the cycle. But to your point on the timing, some of it’s going to be dependent on when in the quarter our customers are taking the bulk of their products. So, if we have early quarter shipments versus late quarter shipments, that can affect the timing of our inventory and accounts payable.

And then one last question for me on the balance sheet, especially with the Malaysia facility coming on line, are you still targeting, like a $45 million of CapEx for fiscal year ‘23, or more or less?

Yes, so, fair question. So, we’re going to add in -- for Q3, we’re adding a $4 million of CapEx for Malaysia, and we’ll add $9 million in our Q4, for Malaysia. So that’ll be $13 million for our fiscal second half. And then, this is going to be an investment over a couple -- over several years. And so, we’ll make another $13 million in the first half of fiscal ‘24. So, that’s not -- that’s given you a little more insight on that investment.

Should I assume that just the maintenance CapEx out to the Malaysia is what, $8 million to $10 million a quarter?

Yes, that’s correct. So, your question, yes, you can maintain the 45 and just add in the figures that I just gave you.

Our final question comes from the Nehal Chokshi with Northland Capital Markets.

Great, thanks. I get to leadoff and cleanup, awesome. So, relative to seasonal patterns, and excluding the 21.9% customer from the September quarter, how did the business actually perform in the December quarter then?

So, the December quarter was an outstanding quarter on in every respect. And so from free cash flow, inventory, all the metrics were strong, cash position. So, as you mentioned, customer -- no customer concentration. And so, we feel we had a really good -- a really great quarter.

I mean, my interpretation here is that the core business excluding that 120%-plus customer from the September quarter was up more than seasonal. Is that a correct interpretation?

Well, we always have customers that will take -- when we have design wins, Nehal, we’ll always -- from quarter-to-quarter, we’ll always have shipments -- large shipments to customers. Sometimes it’s according -- sometimes they change their forecast, and we ship a little bit more in one quarter than another. So, we can’t control that always. But as we said, as the supply chain has improved, that was -- that dynamic was felt a lot harder during the supply chain crunch. Now that we’ve returned to a better supply chain, therefore, that’s why we feel we’ll return to more normal seasonality. But that can always be altered by a new design win that we get in one quarter or over two quarters.

Yes. Basically, in ‘22, we had some larger accounts, but in fiscal year ‘23, now we are adding more larger accounts. So we are growing in more largely accounts and more midsize accounts, and also B2B, B2C. So, indeed, our customer mix is becoming much more diversified, much more healthier, and for sure the volume will be bigger. That’s why we extend to Malaysia for really lower cost operation and campus.

Presumably, just diversification with the larger customers is coming on the higher margin plug and play rack-scale products. Is that correct?

We hope so. So anyway, that’s -- we feel we still have a lot of room to add more customers. And once we have a higher capacity in USA, Taiwan, Malaysia, our plan is to add a lot of more customers.

And then, is there a particular vertical that you guys are seeing the pushups from that -- that you were talking about for the quarter? [Ph]

Data center. Right.

The Push-outs were not in data -- large data center?

Well, he was saying that they were in large data center, but so…

In the large data centers?

Yes.

Okay. All right. Very good. And then for the March quarter, you’re guiding to an 18% Q-over-Q decline in revenue. There’s clearly obviously some seasonality with March quarter. Then there might be, I guess, ongoing push outs from the large data center customers and then there’s also a macro element. Are these the three major elements that are driving the 18% Q-over-Q decline? And then could you potentially help parse out what are rank order of these three drivers here?

So Nehal, if you look back pre-COVID, our typical Q3 decline was 12%. Okay. So, that was during the time of normal seasonal patterns. During COVID, there was a different dynamic of course, because our supply was scarce. But we think as we return to normalized supply that we will have this kind of seasonality.

Okay. And then, as far as the potential runoff of the large customer versus macro, any input as far as what’s the driver there, as far as the above the 12% typical Q-over-Q decline?

Well, we’re engaging with new customers all the time. And so, we’re not looking to be declining, and in fact, just the opposite. So, while we will have some seasonality as in a stable supply chain, we still have our growth plans that are intact and that we remain confident in.

And then my last question here is, did I hear correctly that there’s a new buyback that was implemented, something about $200 million buyback? Can you just clarify that?

No, that’s the existing, already approved buyback.

So, now that you guys have worked yourself back to a net cash position with the strong free cash flow that you’ve highlighted over past two quarters, is it reasonable to expect that you guys are going to put that back to work now?

Yes, it’s completely up to the Board, completely up to the Board. But, I think it’s certainly unreasonable.

We got one Board member here. Charles, your thoughts? Your thoughts on utilizing the buyback?

You know, as why I say, the PE is still low and cash flow is strong, why not?

We have a question from Mehdi Hosseini with SIG.

Yes. So, just a quick follow-up, just a clarification. David, did you employ or did you say that the 10% plus customers that you had in September quarter of last year is going to come back or you’re going to have another 10% plus customer in the coming quarters? It was very confusing.

Yes. So Mehdi, the 10% customer we had a year ago September is a different customer. Okay? The 22% customer that we had in the recent September quarter, again a different customer, was below was did not constitute 10% of our revenues in Q2. Okay, did I clarify that?

Sure. Just as a follow-up, do you expect that particular customer to come back, is that what the confidence behind the June quarter is?

Well, we have -- so…

Indeed with our new product, indeed very strong offering. So we expect any time we will have a more new larger customer or old customer coming back is always very high possibility. And we are working with them very closely there, the partnership would come stronger ever.

This is dynamic.

Yes.

We thrive on repeat business.

Thank you for clarification.

There are no further questions at this time. With that said, concludes today’s conference. Thank you for attending today’s presentation. You may now disconnect.