🔴WATCH LIVE: Super Micro Computer Q1 2025 Earnings Call | $SMCI

Thank you for standing by. My name is Tamia and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Inc. SMCI US Q1 FY25 business update call. With us today are Charles Liang, founder, president and chief executive officer; David Weigand, CFO; and Michael Stager, senior 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. If you would like to ask a question, please press star one on your telephone keypad. Thank you.

Chief Executive Officer, David Weigand, Chief Financial Officer. At the end of today's prepared remarks we will have a Q&A session for sell-side analysts. I will make additional remarks prior to the beginning of the Q&A, but the company will not address any questions regarding the recent decision of our independent auditor to resign or the delay in the filing of the company's 10-K. During today's conference call, Super Micro will address business and market trends from the first quarter of fiscal 2025, including our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive, industry and economic trends. We will discuss estimated financial results, but reference any financial results are preliminary and subject to change based on finalized results contained in future filings with the SEC. By now you should have received a copy of today's news release that was issued after the close of market and is posted on our website. From the results forecasted and reported, results should not be considered as an indication of future performance. The discussion of some of the risks and uncertainties relating to our businesses is contained in our filings with the SEC, and we refer each to those public filings including our most recent annual report on Form 10-K. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue and cash and investments. This call is being broadcast live on Super Micro's investor relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website. Our second quarter fiscal 2025 quiet period begins at the close of business Friday, December 13, 2024. With that, I will turn it over to Charles. Thank you, Michael.

Before we dive into the first quarter details, I am confident in our previous financial reports, and as previously announced, we are actively in the process of engaging a new auditor. We are working with urgency to become current again with our financial reporting. I'm pleased to report that the special committee had today provided the following statement to shareholders, which is also included in our press release. I quote: 'The special committee has completed its investigation based on a set of independently... and that there is no evidence of fraud or misconduct on the part of management or the board of directors. The committee is recommending a series of remedial measures for the company to strengthen its internal governance and oversight functions, and the committee expects to deliver the full report on the complete work this week or next. The special committee has other work that is ongoing but expects it to be complete soon.' And these challenges affect Super Micro's ability to service our customers and partners as we continue to grow rapidly and strongly with the AI revolution, and my confidence in Super Micro and its staff remains stronger than ever. Here are some key quarterly highlights. The preliminary fiscal Q1 net revenue was in a range of $5.9 to $6 billion. At the midpoint, this is up 181% year on year, driven by strong AI chips. The preliminary fiscal Q1 non-GAAP earnings in the range of $0.75 to $0.76 per share was $0.34 last year, approximately 122% year on year growth rate. The preliminary non-GAAP gross margin approximately 13.3%, and non-GAAP operating margin is approximately 9.9%. Both were higher than the previous quarter as customer mix improved and supply chain costs decreased and expertise in shipping in record time, time to deploy, as well as time to online. This milestone achievement reflects our engineering expertise and complex logistics capabilities for large scale AI infrastructure deployment, leveraging our data center building block solutions. We are now building full scale liquid cooled data centers with our rack scale plug and play solutions featuring our latest DLC liquid cooling technology at our leading PUE. Data center TTP, time to delivery and time to online and cost for customers, AI infrastructure data center building block solution is also helping to accelerate the adoption of DLC, driving efficiency and performance while reducing customers' OPEX, achieving greener computing. We expect 15 to 30% of new data centers will adopt DLC infrastructure in the next 12 months. To keep the DLC solutions performing at a data base, our new SuperCloud Composer (SCC) is capable of end to end management from chip level all the way to rack level and data center cooling towers, making it the most powerful DLC data center management software on the market today. SCC further simplifies provisioning of a highly automated software defined infrastructure, supporting customers with rapidly expanding data center market share. On the production front, we are in the process of completing our new Malaysia campus where we expect to begin manufacturing later this quarter. Additionally, we have been nonstop expanding our facilities in Silicon Valley to increase our DLC enabling rack scale production capacity. Now they are hosting 50 megawatts of power and able to produce more than 1500 DLC GPU racks per month, which plans to scale up... future by leveraging our strength in technology innovation, design, build quality, supply management, deployment and data center services. We are pushing our go-to-market to transform Super Micro into a leading USA as well as worldwide AI IT infrastructure company. We are off to a strong start in fiscal 2025. Our total IT solutions deployments are rapidly scaling and our new product developments... production ready. The brand new 200 kW plus Supermicro architecture called DLC with Nvidia which provides near 100% DLC, the whole rack almost no cooling fan required, is also on the right track. The new Supermicro architecture will be able to achieve power usage effectiveness (PUE) close to 1.0. To complete our AI portfolio, the AMD MI 300 and MI 325... Long term investment in DLC cooling is paying off with world class quality and volume capacity, giving us a sustainable competitive advantage and economies of scale. Before passing the code to David Weigand, our CFO, I want to thank our partners, customers, investors and Supermicro employees and express my appreciation for their patience and support until we can provide more information about our 10-K filing. I believe we are well positioned for strong future growth. Thank you.

Thank you, David. Hey, before we get into questions, we appreciate you may have further questions about the special committee's findings as well as our audit timeline. We're not in a position to address those questions on the call today. So with that operator, we'll take a first question.

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. The first question comes from Michael Ng with Goldman Sachs. You may proceed.

Hey, good afternoon. Thank you for the question. Just on the business fundamentals, revenue came in at the lower end of the guidance. I was wondering if you could speak to that and whether you're seeing any market share losses as a result of some of the disruptions. Also, are you hearing from any customers that once this resolution occurs, they'll be able to step up some of their orders, or is it a gating factor? Thank you.

Okay, thank you for the question, Michael. Indeed, last quarter revenue reduced a little bit. I guess the major reason is because there were some customers waiting for the new chip, the Blackwell chip. People are waiting for the new solution, and the new solution, the Blackwell DLC cooling or GPU 200, our solution is ready, just waiting for the new chip. We have 15 cool racks for months now, so we are fly ready just waiting for the new chip to be available, and then I believe we can grow our market share and revenue after that.

Great, and for David, just on the future guidance...

Okay, great. Thank you, Charles. Thank you, David.

Thank you. The next question comes from Samik Chatterjee with JP Morgan. You may proceed.

Thanks for taking my question. On gross margins depending on customer mix, does the progression to getting back to the 14% to 17% that you talked about earlier still remain the base case, or are you having to discount more or be more aggressive on pricing on the current generation products? And as a separate side question, I know you're not commenting on the filings, but any management changes or changes in how you operate that you're planning or thinking about to improve things in terms of getting more disciplined around financial reporting? Thank you.

Thank you, Samik. Yes, I mean, over time, our data center building block solution with SCC, Supermicro Cloud Composer, that provides full end to end solution, for sure we are gradually growing our gross margin and net margin. As to management team, yes, we are always fast growing. In 2023 we grew about 40%, and 2024 we grew more, and this year again we will have big growth. So when a company is fast growing, we continue to add more people, including senior management.

Okay, well thank you. Thanks for the question.

Thank you. The next question comes from Aaron Rakers with Wells Fargo. You may proceed.

Yeah, thanks for taking the question. A couple if I can. Charles, I want to go back. When you originally guided this quarter, the guidance range was like $6 to $7 billion, you came in about $500 million at the midpoint short of that. Given the comments to the prior questions, are you assigning that to just the timing of Blackwell, or was there something that changed the demand or the timing of deployment this last quarter? And also between the Delta and the guide relative to the business update today...

Okay, thank you, Aaron. I mean, this is a complicated question. I believe the major impact is the new chip availability. Blackwell for sure is much higher performance, much better performance for dollars. The good thing is that it looks like it will be available gradually, and hopefully Q1 2025 volume becomes much better. So that's the major factor I believe. As to our 10-K, basically with our differentiating advantages, in the last few months we delivered more than 2000 DLC racks. I believe that is a very high percentage for the whole cooling market. So for huge growth, I am still very optimistic.

Okay, and then two other quick questions if I can. You mentioned $5 billion of inventory coming out of this quarter. Any thoughts on where that might trend coming out of this next quarter, embedded in your outlook that you provided today? And then I apologize for asking, I know you're not talking much about that, but any comments on that front?

Okay, for inventory maybe I can answer a little bit. The company will continue to grow, I believe so. $5 billion in inventory, I believe will continue. As to the special committee investigation result today, I'm very happy to share some very positive information, but as to detail once it's available from them, we will share with the market.

The next question comes from Ananda Barua with Luke Capital. He may proceed.

Yeah, guys, good afternoon, good evening. Thanks for taking the questions. Two if I could. The first is on gross margin. Should we expect it to improve as we go through the fiscal year as you were previously anticipating?

Yeah, by the way, we guided cautiously this first quarter on our margin, so we were glad to be able to exceed. We're doing everything we can to improve that. Competition does bring some pressure, but with Blackwell, new technology, I feel very optimistic because the chance to grow, and as I mentioned, the data center building block solution including SCC, Supercloud Composer, which provides end to end management from chip level to rack scale to data center water tower. I believe all of those will help our growth, and we also start to be able to provide onsite deployment services.

Appreciate that. And the follow-up is just a general working capital financing question. The question is, can you explain the access to capital situation as we go forward, and how would you like the investment community to think about the access to capital situation? Thanks.

Yeah, every quarter we are making a reasonable good net profit, so basically we should be in good shape.

Okay, guys, thanks so much. That's helpful. Thank you.

Thank you. The next question comes from George Wong with Barclays. You may proceed.

Last time you guys alluded to something in the June quarter. Just curious whether this is still on track. Any high level in terms of when do you think the Blackwell is going to show up in the P&L?

Yeah, very big question indeed. We ask Nvidia every day. I hope their production can go smooth and go for high volume very soon. Once they have chips available, our solutions are fly ready. So we continue to work with them very closely to develop current products: GB200, MGX, 72, and B200 liquid cool.

Thank you. God, that's helpful. Just a quick one if I can. Just how to think about gross margin in the era of Blackwell versus Hopper? Can you talk about puts and takes on gross margin for the GB200, especially in light of reference design from Nvidia and any incremental value add from Supermicro?

Yeah, thank you. For sure we expect more competition because people know the market is so big now. But our onsite deployment service business is new, and I believe we are able to provide a unique, very efficient time to delivery, time to online advantage to customers. So yes, competition is strong, but I believe we are in a good position.

Okay, thanks a lot, Charles. I'll go back to the queue.

Thank you. The next question comes from Nehal Chokshi with Northland. You may proceed.

Yes, thank you for taking my questions. A couple questions. Now, could you give us some detail as far as what percent of overall revenue do the 10% customers represent in the September quarter?

But at the same time, we continue to gain more new customers, especially in Europe and Asia, so I believe we will be able to keep a healthy ratio.

Okay, great. And then Charles, I think there's a strong feeling in the investment community that the chairman and CEO roles, if separated, could be beneficial. I just wonder your thoughts on that.

As a founder, I have thought about this question many years ago. I am very open minded. I am a technology guy, technology is my best interest, but the overall consideration is the best benefit for shareholders and the company.

And just to be clear, do you see it potentially being in the interest of shareholders of separating these roles here?

For sure it is a natural consideration for the board, shareholders, for the company, and for my family too. Thank you for taking my question.

Thank you. The next question comes from Vijay Rakesh with Mizuho. You may proceed.

Charles, on the September quarter and December, how many liquid cool racks did you ship in September? And in December...

DLC? It was just a little below last quarter, but I believe percentage-wise, because of safe water, energy power, and water requirement, it's a trend, so I believe we are growing in percentage.

Got it. And when you said down sequentially into December quarter on the H100 liquid cooling, any idea how much that is sequentially?

We did not share the number, but I believe DLC cooling will continue to grow very quickly, and we are very happy to lead.

Just on the auditor, with the November 16th deadline, are you comfortable that you will have an auditor and file a plan with NASDAQ?

Good. Thank you.

The next question comes from... Wondering, Charles or David, could you break out what your expected revenue in Blackwell was supposed to be in Q1 guidance and what you implied in Q2 guidance? And second, do you see a risk of supply allocations due to this auditor and filing issue, especially from Nvidia? Are they supporting you through this?

Yeah, our relationship with Nvidia has been multiple decades, and our growth and cooperation between two companies are very good. According to our relationship and communication, things are very positive.

Great. And then I guess the Blackwell numbers implied in the last quarter and this quarter?

That's hard to answer because we don't know when Nvidia will have Blackwell available. Every month we work with them very closely, co-develop solutions, and service common customers. Once they have good volume available, I believe we will have a good share of their products.

Just on the DLC side, ramping up your production capacity and supply chain. Can you give some color?

We focused on DLC cooling much earlier than the industry. In the last few months, we already shipped more than 2,000 racks. So far, the feedback from customers is very happy. Customer satisfaction is even better than our air-cool solution, so we feel very excited. Our investment over the last three years is paying off, and we believe it will continue to be our major advantage, including the whole data center end to end solution.

Great, thank you. And good luck with finding a new auditor.

Thank you. The next question comes from... Medi Oini with... you may proceed.

Yes, thanks for taking my question. David, regarding cash flow, it seems like there was a one-time positive impact. Your days of inventory went up but you were able to significantly increase operating cash flow. Did I hear you correct, and what is the item that helped with positive operating cash flow?

Was it entirely driven by working capital reduction, or was there something outside of working capital that helped?

Maybe I can add. When we grow about 200% year over year, for sure we need much higher inventory to support customer demand. When our growth becomes more moderate, inventory, accounts receivable, and payable all help, so it is a good challenge.

Sure. Got it. And then Charles, maybe you can help us with an update on your total capacity, especially with the Malaysia expansion, and how is the utilization of global installed capacities tracking?

Very good question. We expect to continue growing very fast, which is why we have been preparing huge capacity in Silicon Valley, Taiwan, and now especially in Malaysia. Long term, we need those capacities, but in terms of utilization at this moment, I would like to see it at 50%. This is...