Thank you for standing by. My name is Rhianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Fiscal First Quarter 2024 Results Conference. With us today, Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Vice President of Corporate Development. 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. I will now turn today’s call over to Michael Staiger. Please go ahead.

Good afternoon and thank you for attending Super Micro’s call to discuss financial results for the first quarter, which ended September 30, 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 -- 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 will 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 second quarter of fiscal year 2024 and the full fiscal year 2024. There are a number of risk factors that could cause Super Micro’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 2023 and our other SEC filings. All of these documents are available on the Investor Relations 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. 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 will now turn the call over to Charles.

Thank you, Michael, and good afternoon, everyone. Today, I am pleased to announce that we are off to a good start for fiscal 2024, with first quarter revenues of $2.12 billion. We navigated tight AI GPU and key components supply conditions to deliver total solutions and large compute clusters, especially for generative AI workloads where our backorders continue to expand faster than our forecast. During the first quarter, demand for our leading AI platforms in plug-and-play rack-scale, especially for the LLM-optimized NVIDIA HGX-H100 solutions, was the primary growth driver. Many customers have started to request direct-attached cold-plate liquid-cooling solutions to address the energy costs, power grid constraints and thermal challenges of these new GPU infrastructures. In some cases, customers are able to double their datacenter AI computing capacity using our DLC solution due to lower system power requirements, lower PUE and higher computing density per cluster. To meet this strong demand, we have been continuously expanding our validation and production facilities. By the coming March quarter, we expect to complete a dedicated capacity for manufacturing 100 kilowatt racks with liquid-cooling capabilities, that will further expand our total rack production capacity to 5,000 racks per month in full-speed mass production. The increased AI business also includes our new inferencing platforms and telco-optimized edge products based on the L40S, L40 and L4 and for sure H100 as well, AI product lines. Furthermore, the upcoming Grace Hopper Superchip-based MGX products for both generative AI and inferencing AI are just ready for volume production. Our broadest AI solution portfolio also includes Intel Gaudi 2, PCIe Flex, PVC a codename from the backyard [ph], as well as AMD MI250 and MI300X and MI300A based platforms. We fully expect many of these products to gain broad adoption and expand our share in the accelerated compute market.…

Thank you, Charles. Fiscal Q1 2024 revenues were $2.12 billion, up 14% year-over-year and down 3% quarter-over-quarter. Revenues were towards the end of our guidance range -- the upper end of our guidance range of $1.9 billion to $2.2 billion, driven by AI-related platforms despite supply-chain challenges and summer seasonality. Next generation AI and CPU platforms continue to drive strong levels of design wins, orders and backlog. We expect diversified growth in fiscal 2024, driven by top-tier datacenters, emerging CSPs, enterprise investments in new AI, CPU servers and edge, IOT, telco markets. We are also enhancing our offerings in Storage, Switches, Software and Services to strengthen our Total Solutions offerings. During Q1, we recorded $917 million in the Enterprise and Channel vertical, representing 43% of revenues versus 45% last quarter. This was up 10% year-over-year and down 6% quarter-over-quarter due to seasonally lower enterprise spending as customers focus on AI investments. The OEM appliance and large datacenter vertical revenues were $1.17 billion, representing 55% of Q1 revenues versus 53% last quarter. This was up 26% year-over-year and flat quarter-over-quarter. One existing CSP large datacenter customer represented 25% of total revenues for Q1. Our emerging 5G, telco, edge, IoT segment revenues were $31 million, which represented 2% of Q1 revenues. AI, GPU and rack-scale solutions again represented over 50% of our total revenues this quarter with AI, GPU revenues in both the enterprise channel and the OEM appliance and large data center verticals. The mix of complete systems, storage and rack-scale Total IT Solutions has increased over the last two years. Server and Storage Systems comprised 93% of Q1 revenue and Subsystems and Accessories represented 7%. ASPs increased significantly on a year-over-year basis and decreased slightly quarter-over-quarter driven by product and customer mix. By geography, U.S. represented 76% of Q1 revenues,…

Thank you. [Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital. Your line is open.

Hey. Yeah. Good afternoon, guys. Thanks for taking the questions and congrats on the strong and ongoing execution. I guess, yeah, just so a couple of the starts. Charles, can you talk about the degree to which you guys either are benefiting or anticipate the benefit from the increased NVIDIA supply that was pointed to China but now needs to find other places to go? And to the degree you think you might benefit, if you could give us some sense of at what rate that benefit makes its way out of China and into other countries. And then I have a follow-up. Thanks.

Thank you for the question. Again, it’s a complicated situation. But at this moment, we believe December quarter, our supply from NVIDIA will be much better than last quarter. And that’s one of the reasons why we are able to fulfill more percentage of customer demand and that’s why we say, $2.7 billion to $2.9 billion should be our target. So basically, a price condition that we need to meet.

That’s actually really helpful context. I appreciate it. And then, I guess, sort of dovetailing from that, Charles. So the midpoint of the implied guide for the fiscal year, the raised guide, $10.5 billion, implies that the March quarter and June quarter would also be about $2.8 billion, which is the midpoint of your December quarter guide. And then you also, though, made mention of growth accelerating. And so -- and that -- and it seems like supply is getting better. You also have co-op capacity coming on, going into the year. So I guess the question is, is there conservatism built in into even the implied fiscal year guide that’s been raised or is there some pull-forward in December quarter that you think might be challenging to duplicate in the March and June quarter? It seems like conservatism, but just wanted to check that? Thanks.

Yeah. Thank you. Again, we continue to gain lots of design win. So our back order has been growing faster than what we forecast in reality. So at this moment, $2.7 billion to $2.9 billion for December should be a very conservative number. And for our whole fiscal year, $10 billion to $11 billion, again, should be a conservative number. So I feel very optimistic to continue to grow quickly and that’s why we continue to grow our rack-scale, including a difficulty rack-scale rather than production capacity. Likewise, just, before we have 4,000 rack per month capacity and now pretty much we will grow to 5,000 rack per month capacity very soon. So we are very optimistic for the future growth.

Our next question comes from George Wang with Barclays. Your line is open.

Oh! Hey, guys. Hey, Charles. Thanks for taking my question. Just maybe you could give some color in terms of the allocation from other suppliers and partners, kind of maybe in the near-term, kind of for the future, like the AMD MI300, which is expected to launch in the first quarter 2024. And also aside from H100 from NVIDIA, any other upside when the L40S from NVIDIA is ramping? Just curious and also including Gaudi from Intel. Maybe you can give some color on allocation from additional suppliers?

Yeah. Thank you for the question. Yes. I mean, as you know, we have a very strong NVIDIA product line, including the L40S, right, and including the CG1, CG2 on the way. And AMD MI300X also getting ready. And Intel Gaudi 2 is ready to volume production. So although we have a very good demand and very strong supply capacity. So, again, I feel very optimistic for a quicker growth.

Okay. Thanks. I have a quick follow up if I can. Just in terms of when Malaysia coming out and also in the future, kind of Taiwan facility, any thoughts on the kind of impact to the profit margin and kind of obviously with the much lower labor costs, can you kind of quantify, maybe give some color just on expected operating margin accretion going forward?

Yes. I mean, as of what I just shared, our utilization rate for U.S. and Taiwan capacity today only about 60%. So when we have a higher utilization rate, our overall cost will be lower, right? So that’s why when we grow revenue, our profitability will increase. And Malaysia, as you know, is a lower cost campus. So once we start production in Malaysia, our cost will be better and profit margin will be slightly improved.

Our next question comes from Janik Wing with Susquehanna Financial Group. Your line is open.

Yes. It’s actually Mehdi Hosseini. Thanks for taking my question. David, your midpoint of the December quarter guide implies 57% year-over-year growth, but operating margin declining by about 100-basis-point. I understand utilization rate is in the 60% range, but as you bring up utilization rate, how should I think about the OpEx and the leverage from here on?

Yeah. So we expect that we will continue to get operating leverage, Mehdi. We were, I think, a little conservative in our guide for OpEx in Q2. So we -- and as we were in Q1, and so we came in a little bit lower. We are doing everything we can to do that in Q2 as well. So back to your operating guide question. We came down a little bit on gross margin year-over-year, as you know, but we expect -- as Charles mentioned, we expect some gross margin leverage, as well as operating margin leverage as we -- as our operating expenses never increase at the rate that our revenues are.

Got it. Thank you. And Charles, a big part of your cause is memory and other components. And everything we have heard from memory manufacturers that they are not going to sell at prices that were prevalent just a couple of months ago. So memory prices are going up. And how do you alleviate that inflationary trend to be able to expand margins?

Thank you. I mean, basically we are able to pass-through our cost to customers. So for that portion, basically we are kind of okay. We won’t be impacted by that. At least it won’t be impacted too much.

Our next question comes from Jon Tanwanteng with CJS Securities. Your line is open.

Hi. Thanks for taking the question, guys, and great quarter and a nice outlook. Just wanted a little more color on the gross margin guidance and outlook. I mean, I assume you are getting better margins and utilization and on your new facilities on the ramp. Are you simply planning to give all that back with the share gain initiatives and the hyperscale mix or is there some input cost component and kind of when should we expect the timeframe for gross margin leverage to really become apparent? Is it only with the new facilities or can that happen a little sooner than that?

Well, it’s a combination, Jon, of -- as we ramp revenues up, we are going to get leverage on the gross margin because, as Charles mentioned earlier, we are going to get higher efficiency and factory throughput as we -- which will lower costs as we put more through the factories. So we will get some benefit there. We will also get benefit as we transition more manufacturing over to Malaysia and Taiwan. And I think that -- so that’s why right now we are, although, very competitive situation, we are maintaining our margin guidance for Q2.

Yeah. I can add a little bit of some color. I mean, kind of our software business is growing. Our service, including on-site deployment, all those will help our gross margin, our value bridge. So at this moment, we should be on the right track, healthy direction.

Got it. Okay. And then just a question on the, I think you said, you are building seven new buildings here in the U.S. I know you are expanding and looking for places to put facilities in North America. Would those all be margin accretive or neutral or negative, just given the higher costs here? How do we think about those facilities and their impact?

Oh! Very good question. Indeed, we are adding some more buildings in the Bay Area and most of those will be rental buildings, because our growth is faster than what we can build in a building. So it will be a rental facility. And then I did mention about we are looking for another location, hopefully in a little bit of a lower cost state in North America. So we are planning for building a new campus in -- we will decide in the next few months, I believe. But short-term, new buildings in Silicon Valley will be rental property.

Our next question comes from Nehal Choski, Northland Capital Markets. Your line is open.

Yeah. Thank you. You may have already addressed this, but what are your expectations for AI revenue contribution with respect to the midpoint of December quarter guide being up 32% quarter-over-quarter?

Yeah. So I think we are expecting really the same performance, Nehal. We will expect it to be in a range of over 50%.

Okay. And can you give a little bit more precise number as far as what the exposure was in the September quarter other than greater than 50%?

That’s -- we are giving that approximate figure and that’s our guide.

Yeah. Basically AI revenue percentage continues to grow, but hopefully in ALCN [ph] consistently with…

Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Yeah. Thanks for taking the question and also congrats on the quarter. I am just curious, going back to the supply side of the discussion, how would you, as you are engaging with customers and thinking about their build-out plans in their datacenter footprints for AI, how would you characterize the evolution of lead times on these higher end GPUs? I mean, relative to what it was maybe 90 days ago, how has that evolved and how are you seeing that evolve into the current quarter?

Yes. It’s a complicated job. However, because our building-box solution and our global footprint together, we have a huge lead time. We support hundreds of customers. So [Technical Difficulty] indeed, relatively, we are able to take care of the allocation, the lead time, the inventory control, product flow-in, more efficient than our competitors. And we are continually improving in that area.

So, you would say that lead times have improved throughout this course this last quarter and you would expect that, it sounds like to continue improving in the December quarter. It’s kind of a fair characterization.

Yes. And that’s why our inventory utilization rate will be improving. So, before, I guess, we have about 90 days turnaround time.

Yes.

And I guess that will be improved when the scale continues to grow and when we continue to…

Yeah.

… leverage our building-box solution, situation will continue to improve.

Yeah. And then the follow-up question would be, as the market evolves more competitively and you see, I know a prior question on the MI300, you have got the Gaudi Silicon. I guess the way I think about it is these customer deployments are longer cycle. It’s not like these decisions are made in a given quarter. So, as we look to these products, particularly the MI300X ramping, really starting early part of next year and through the course of next year. Are those projects that you are already seeing visibility into and that actually adds another layer of growth to the pipeline? Are those projects that you have already been designed in and you are just waiting for those products to kind of launch to really start to see that incremental revenue for those competitive offerings?

Yeah. You are right. Because our building-box solution, so we are able to design all that and make a new technology available earlier than the market, basically. So, usually we send our solution to customer for evaluation so our customer can make a decision earlier and that allows Super Micro, there will be an earlier time to prepare the product, prepare inventory. So, it doesn’t matter if we have a solution, AMD solution or Intel solution, we provide a same building-box solution and we gain time to market advantage. We provide a customer earlier seeding, earlier system so that they can validate in advance.

This will conclude our question-and-answer session and our conference call today. Thank you for joining us. You may now disconnect.