Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Incorporated Fiscal Third Quarter 2023 Results Conference Call. Today’s conference is being recorded and 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. And I will now turn the conference over to Michael Staiger, Vice President of Corporate Development. You may begin.

Good afternoon. And thank you for attending Supermicro’s call to discuss financial results for the third quarter, which ended March 31, 2023. 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 have 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 fourth quarter of fiscal year 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 our 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. I’ll now turn the call over to Charles.

Thank you, Michael, and good afternoon, everyone. Our revenue for the third quarter of fiscal year 2023 totaled $1.28 billion, down 5% year-on-year and below our initial guidance range as we previously announced, but our non-GAAP earnings per share grew over 5% year-on-year to $1.63, compared to $1.55 a year ago. While the quarter did not unfold as we expected, I am strongly encouraged by our current business momentum as we navigate market uncertainties with our new generation X13, H13 and H100 leading-edge products, especially in artificial intelligence. These new AI product demands from top-tier companies have led us to challenges in terms of new key components availability. Compounded with the economic headwind, our Q3 results were reflective of these difficult yet opportune conditions. The good news is that we have already started to address these component shortage pressures over the past few months and we are in a much-improved situation going forward. We have started to produce and ship some back orders since April. Here are a few highlights for the quarter. First, record pace of GPU leading-edge design wins and growing back order, including winning at least two new global top 20 customers. Second, we refreshed our entire product portfolio based on new CPU, GPU, Storage and Fabric technologies from key partners including NVIDIA, Intel, AMD and others. And third, increased customer demands of our rack scale PnP solutions and continued expansion and transition from a server/storage hardware manufacturer to a Total IT Solutions provider. With applications like ChatGPT that heavily count on large language models or LLM and generative AI, the state of AI infrastructure business has grown rapidly. This AI momentum has benefited Supermicro greatly as we are deploying many of the world’s leading and large-scale GPU clusters. In addition, we have built a close and…

Thank you, Charles. Fiscal Q3, 2023 revenues were $1.28 billion, down 5% year-over-year and down 29% quarter-over-quarter, which was below our initial guidance range of $1.42 billion to $1.52 billion. The shortfall was primarily due to key new component shortages for Supermicro’s new generation server platforms which have been mostly resolved to-date. Our next generation AI platforms are driving record levels of design wins along with strong orders from top-tier customers and a record backlog. We are well positioned for a strong finish to our fiscal year 2023 as we rank up -- wrap up -- ramp up deliveries of our new platforms to key customers. We note that our shipments against a record backlog may be constrained by supply chain bottlenecks due to high demand for our advanced AI server platforms. Q3 results were driven by our high growth AI/GPU and rack-scale solutions which represented approximately 29% of our total revenues and we expect significant future growth. An existing Cloud Service Provider customer represented more than 10% of revenues for the first time. On a quarter-over-quarter basis, key new platform component shortages and seasonality impacted our three end market verticals. On a year-over-year basis, we had growth in our OEM appliance and large datacenter vertical reflecting momentum with new datacenter and CSP customers. We recorded $646 million in the Enterprise and Channel vertical, representing 50% of Q3 revenues versus 53% last quarter. This was down 22% year-over-year and down 32% quarter-over-quarter due to new platform component shortages. The OEM appliance and large datacenter vertical achieved $601 million in revenues, representing 47% of Q3 revenues versus 43% last quarter. This was up 30% -- 37% year-over-year as we gained momentum with existing and new datacenter, CSP, and OEM cloud appliance customers and down 23% quarter-over-quarter due to new platform component…

Operator?

Thank you. [Operator Instructions] And we will take our first question from Nehal Chokshi with Northland Capital Markets. Your line is open.

Yeah. Thank you. Very impressive buyback rate of $150 million in the quarter to $100 a share. So a very strong statement that the shares are attractive prices and nice to see that backed up with the $1.5 to $11 share fiscal year 2023 guidance. So, with that in mind, on the at least 20% year-over-year revenue growth for fiscal year 2024, what’s your level of confidence that Supermicro can operate at the high end of the target model that you guys communicated two years ago, that being the 14% to 17% gross margin range?

So…

Yeah. Indeed our confidence is very good. So, again, because of the economic headwinds, so we try to be more conservative here. But at least 20% year-over-year growth and we expect -- we hope more than that for sure.

And what about with respect to gross margin?

Yeah. So, Nehal, we -- yeah. Back two years ago, we gave a 17% to 21% -- 23% topline growth. Obviously, we’re in there at a minimum of 20%. And for the gross margins, we continue to, like I said, to wrestle with taking market share and also balancing that against gross margins. But we’re confident with our new manufacturing facilities coming online that we will be able to improve our gross margins. And we also, as we come out of this quarter and we begin to ramp our new product offerings that we will be able to improve margins as well.

Okay. Great. And are you guys seeing any signs of general corporate IT demand weakening -- weakness as the CDW preannounced has indicated?

Yeah. The general IT market has slowed down a little bit, but this year we have a lot of high-end high computing, especially GPU product line that we saw a very strong demand. So, overall, our growth will be strong.

Okay. And then do you guys have any 10%-plus customers in the quarter and any expectations that, that would contribute within the June quarter as well?

So we did have a new 10% customer this quarter. They’re not a new customer, but they’re a new 10% customer. And we expect from time -- from quarter-to-quarter, Nehal, depending on the delivery of these -- of our design wins, we will see other customers over -- achieve over 10% of our revenue. So that will continue to happen.

And is that the expectation that there will likely be a new 10% customer pop up within the June quarter?

It’s very possible.

Yeah. But at the same time, we are also greatly growing our operating NIM through our channel, through retail and also through online business. So we try to balance the growth between the large accounts and a lot of small account. And so we are…

Thank you, guys. Best of luck. Yeah. Great. Best of luck, guys. Thank you very much.

Thank you.

We will take our next question from Mehdi Hosseini with SIG. Your line is open.

Yes. Thanks for taking my question. A couple of follow-ups for me. I want to better understand. I remember last earnings conference call, you discussed your confidence in the backlog, and back then, there was a little bit of a pushout of revenue opportunities from perhaps March into June, but you were very confident that as we approach June and September, it should materialize and now that the magnitude of the revenue push was more than expected. So what happened if you if you were confident with the backlog in January, what prevented you to procure the key components? And I have a follow-up.

Sure. There was a shift -- there was a dramatic shift toward new AI solutions, Mehdi. And so therefore, it was larger than anyone expected and so the parts availability constrained the amount of shipments that we could do. Obviously, we anticipated a slower quarter, because the third quarter is seasonally slower and we also mentioned -- you’re correct, we also mentioned some customers that tapped the brakes and moved out to Q2. But it was really the component shortages that hit us this quarter.

Yeah. I’m going to Q1, we have some customer postponed shipping right? But at the same time, some other customers growing and they want a high-end, especially GPU product line. And for those high-end GP product line and new design, yes, we have some key component shortage, including GPU/CPU combination and kind of high power thermal solution. So we did a very big effort to prove in those components and now situation have been dramatically improved. That’s why we are pleased for June quarter.

Okay. Thank you for details. And David, one that cash flow items. In the December quarter, you were able to work down inventory, but then there was one non-working capital item, which caused the decline in cash from operation, and this quarter, March, it was actually the other way. You had to purchase inventory, but there was a non -- there was positive non-working capital item that came in. Can you help us understand how I should think about these dynamics in working capital and how is it going to change looking forward?

Yeah. I think, as we go out, Mehdi, I think, that’s a good question, because we will -- working capital wise is this fourth quarter is going to be challenging for me, because we are going to be moving -- acquiring a lot of inventory. And so it will -- that will challenge our cash flows during this quarter. So that’s something -- the timing of inventory and shipments is critical. And as going into this Q4 or ending Q3, we were building inventory, and yet at the same time, as Charles mentioned, we couldn’t ship things, because we didn’t have every -- all the parts that we needed. So we’re growing inventory at the same time that we’re constrained on shipping. So what that does is it caused our working capital metrics to go down a little bit and that’s evident in our cash conversion cycle. But I would say that in spite of that, we generated some of our best cash flow. We generated $200 -- almost $200 million in cash flow and we returned $150 million of that to the shareholders. So, what I would say is that, yeah, going into Q4, we -- cash flow is very important. But, I think, ultimately, the business has shown that it generates very good cash flows.

Yeah. Although, like David said, recently cash flow a little bit high, but will be very safe. I would have to say, we will be super safe and a little bit tight, because we would pay -- purchase a lot of components for growing June quarter and following the September quarter. I believe June and September quarter will be very strong, especially September quarter, we would say. So we had to prepare components and that’s why cash flow will be a little bit high, but will be super safe.

Okay. Thank you. I will go back in the queue.

[Operator Instructions] And we will take our next question from Ananda Baruah with Loop Capital. Your line is open.

Yeah. Good afternoon, guys. Thanks for taking the question. I really appreciate it. Two, if I could. At the risk of asking maybe the, obvious, I think, 90 days ago, you guys had, Charles said on your earnings call that, you had expected in the second half of this calendar year. So September, December quarter to be in a position to start -- this is the way that I interpreted Charles, making a regular part of your book of business, the layering in of larger projects from the cloud cadre from the AI cadre, like that. And I guess my question is, are you seeing -- is what we’re seeing in the June quarter that you’re talking about, is that a pull forward of what 90 days ago we anticipating later this year? So is that dynamic happening sooner kind of as you would describe it holistically or is this something different than that? And then I have a follow-up. I appreciate it. Thanks.

Very good question. Indeed, the June quarter, our demand is very strong, because of the component shortage. So, at this moment, we try to be conservative. So that’s why we share with you $1.7 billion to $1.9 billion. That’s based on some shortage. If we can find those parts quicker than indeed the June quarter will be much stronger than that. And September quarter, likewise you say, what -- likewise your question is September quarter, we will continue to be very strong, and as well as the December quarter, I believe. So now that really problem is a shortage. So we had to build other components for inventory. At the same time, we are not quite sure how much we can grow in this quarter. But for sure, $1.7 billion to $1.9 billion should be a very safe number.

Really appreciate that. That’s helpful context. And then I guess the follow-up is for Dave -- Dave, for you. Just with regard to your gross margin comments. Any greater context you can share that’s responsible. I realize that this is sort of at the front end of beginning to mix in some of this larger footprint business. But I would love to get a better understanding of how you guys are thinking about sort of the gross margin manifestation if we think about the continued layering in of larger footprint, which may come at a slightly lower margin. Is it really that over time, we just expect a greater presence of that lower margin business with some efficiency gains or is it just in the beginning here, the margin will be lower for the new business, but then collectively, the P&L gross margin expands over time?

Yeah. So we’re looking at it and on -- in the -- your latter alternative, Ananda, and here’s why. So right now, there’s three things that we’ve been facing. We’re having to face more air transportation costs in order to make our deliveries. So that impacts our margin. And also, we’re having to pay other expedite fees. That impacts our margin. Number two, we ran a lot less through our factories than in Q3 than we did in Q2. So your margin efficiency, your ability to spread your fixed costs, it’s tremendously impacted on a smaller scale. So as we scale up, we improve our margins. Thirdly, the -- as we ramped our new product offerings, there is an efficiency on these new -- on the production of these new products. So we are going to improve the efficiency of these products, which will improve the margin. And so those three things alone speak to margin improvements. But again, we are -- we have -- we believe we have best-of-breed AI products. And those are in high demand and people are coming to us and so we’re going to -- we’re very strategic about taking the market.

Yeah.

Great. Thank you.

I can add some color. I mean, as I shared, I mean, we are building a $20 billion of revenue, hopefully in midterm and that’s why a grow our capacity and support a large customer is very important to us. Once our volume becomes higher, our costs will be improved and then business operation efficiency will be higher. So we are doing better great way to grow our revenue. And so, I mean, once we start to reach that number under $10 billion to $20 billion, I guess, our gross margin will start to grow, because we won’t always invest for big growth after that.

I appreciate that context guys. Thanks a lot.

And we will take follow-up questions from Mehdi Hosseini with SIG. Your line is open.

Yes. A couple of follow-ups. David, did you say that the OpEx for the June quarter will be around $145 million?

Let’s see. That sounds about -- on a non-- we have -- we gave both GAAP and non-GAAP guidance, Mehdi.

Okay.

So our...

Let’s see, the non-GAAP was $145 million.

Yeah. Let’s see. Just a second. Yeah. Yeah. $145 million for GAAP.

Thank you.

Sure.

I’m sorry, GAAP or non-GAAP.

It was -- GAAP is going to be $145 million.

Yeah.

And that includes $10 million in expected stock-based comp. So that would -- that means $135 million for non-GAAP.

Okay. That’s what I was looking for. Okay. And then CapEx for the June quarter?

Yeah. We said $11 million to $14 million.

$11 million to $14 million. Okay. Thank you.

And ladies and gentlemen, this concludes our question-and-answer session and today’s conference call. We thank you for your participation and you may now disconnect.