Super Micro Computer, Inc. (SMCI) Earnings Call Transcript & Summary

Thank you for standing by. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc., SMCI U.S. Q4 2024 Earnings Call. With us today, Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Vice President of Corporate Development. [Operator Instructions]

Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the fourth quarter, which ended June 30, 2024. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; and David Weigand, Chief Financial Officer. At the end of today's prepared remarks, we'll have a Q&A session for sell-side analysts. Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at ir.supermicro.com. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current new product offerings and competitive industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC, and we refer you 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. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Super Micro Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Super Micro. Our first quarter 2025 quiet period begins at the close of business, Friday, September 13, 2024. And with that, I will turn it over to Charles.

Thank you, Michael. Today, I'm pleased to announce another record quarterly result of $5.31 billion, a 143% year-over-year growth. For fiscal 2024, we have achieved $14.94 billion in revenue, a 110% year-over-year growth rate. To put this in perspective, our Q4 revenue exceeded the full year revenue of fiscal 2022. Our robust growth is driven by our technology and product leadership in AI, infrastructure market, especially with generative AI training and inferencing. We have been scaling quickly to secure a larger share of AI ASP opportunities, deploying some of the largest AI SuperClusters in the world. Leveraging our system building blocks, we build and optimize rack-scale plug and play solutions with the latest DLC liquid cooling technology, helping our customers achieve the best TTD, time-to-deployment, and TTO, time-to-online, and lowest TCO with their AI solutions. Here are some key quarterly highlights. First, Super Micro is pleased to be included in the NASDAQ 100 Index last quarter. Fiscal Q4 net revenue totaled $5.31 billion, up 143% year-on-year with a strong record high backlog. We could ship more if not for DLC liquid cooling component shortage. Fiscal Q4 non-GAAP earnings of $6.25 per share were well above $3.51 last year, which was 78% year-on-year growth. Our Q4 operating margin is 7.8%, which is lower than what we expected due to the higher mix of hyperscale data center business and expedited cost of our DLC liquid cooling components in June and September quarter. Some key new component shortage delayed about $800 million of revenue shipped into July, which lowered our EPS for June and will be recognized in our September quarter. The availability of our Malaysia facility later this calendar year and our dominating position in DLC liquid cooling total solution will be instrumental in increasing our profitability. Supermicro is powering the largest AI factories around the world today. We believe more and more datacenters will be opting for our latest DLC liquid cooling solutions, which dramatically improves TCO, relative to traditional air-cooled data centers and is less environmental taxing. We have proved that DLC solutions also offer higher performance and better uptime, with advantages to support the upcoming new AI chips. At COMPUTEX Taipei, I shared that "Green Computing can be free with a big bonus". This means the cost of deploying liquid cooling DLC is on par with traditional air-cooled data centers and significantly lowers the operational power cost. Since then, we have been delivering over 1,000 highly reliable DLC racks to multiple customers. Our goal is to quickly make a DLC liquid cooling to be a mainstream solution for most datacenters and AI factory that focus on increasing efficiency and performance while reducing OpEx. We are targeting 25% to 30% of the new global data center deployments to use DLC solutions in the next 12 months, with most deployments coming from Super Micro, we believe. We are happy to help any customers, transforming and adapting their existing air-cooled data center to DLC liquid cooling in the coming years for 4 major reasons. First, it helps customers save energy cost up to 40%. Second, it will boost data center computing performance. And third, it helps pull in customers' data center lead times or to be more precisely, reduce their time-to-online because of less electrical power required. And fourth, it reduces carbon footprint for our one and only Mother Earth. As an end-to-end IT infrastructure solution company, our customers' experience is our #1 priority. By leveraging our system building block and rack-scale plug and play solutions, we help our customers achieve the best time-to-market advantage with new and performance-optimized technologies. Now we are further expanding this solution to the entire data center, with rapid deployment of large-scale AI infrastructure. Data center worldwide are facing power shortage and cooling inefficiency challenges. Building these new AI-ready data center traditionally takes a long time, averaging 3 years, for example. Our upcoming Supermicro 4.0 DCBBS, Datacenter Building Block Solutions, will reduce customers' new data center build time from about 3 years to 2 years. For smaller facilities or older data center transformation, Data Center BBS can enable an optimized, cost-effective data center in less than 1 year or even in just 6 months. This new offering will significantly improves data center's TTO, time-to-online and cost with full integration of AI compute, server, storage, networking, rack, cabling, DLC liquid cooling, facility water tower, end-to-end management software, on-site deployment services, and maintenance. We will start offering it later this calendar year. Playing a significant role in realizing our Datacenter Building Block Solution and providing additional economics of scale, our new Malaysia campus will start production this November. With its geographic advantages, we expect it to quickly ramp up shipping volume and improve our cost structure. In the U.S., we are adding new buildings and production/POC provisioning capacity near our Silicon Valley headquarters as well, which will further boost our monthly DLC liquid cooling rack capacity and value this fiscal year. Moreover, we are on track to expand to a few other global manufacturing locations, leveraging our strength in product design, build quality, supply chain and deployment, positioning Super Micro as one of the largest IT infrastructure companies. In summary, we are entering fiscal 2025 with record high backorders, winning products, large volume DLC liquid cooling capacity, Datacenter Building Block Solutions, and more new customers. While our long-term investment impact short-term profitability, they position us well for future success by providing a sustainable competitive advantage and necessary economics of scale. This gives me confidence to forecast the September quarter revenue between $6 billion to $7 billion, and fiscal 2025 revenue between $26 billion to $30 billion. Again, we anticipate that the short-term margin pressure will ease and return to normal range before the end of fiscal year 2025, especially when our DLC liquid cooling and Datacenter Building Block Solutions start to ship in high volume later this year. Lastly, I would like announce 10-for-1 forward stock split of Super Micro's common stock to make ownership of Super Micro stock more accessible. We are targeting trading on a split-adjusted basis commencing at market open on October 1, 2024. Before passing the call to David Weigand, our CFO, I want to say thank you to our partners, customers, Super Micro employees on an incredible year where we were able to bring AI at scale to the world and to our shareholders for your continued support. David?

Thank you, Charles. We had robust growth in the fiscal year, and I'm pleased with the progress we made on our strategic initiatives. For fiscal year '24, we reported revenues of $14.9 billion, representing 110% growth over fiscal year '23 revenues of $7.1 billion. Fiscal year '24 non-GAAP diluted EPS of $22.09 grew 87% over fiscal year '23 non-GAAP diluted EPS of $11.81. Between fiscal year '21 and fiscal year '24, we achieved significant operating leverage with revenues growing at a compound annual growth rate of 61% per year, while non-GAAP operating expenses only grew at 19% per year. Between fiscal year '21 and fiscal year '24, gross margins have met or exceeded the target range of 14% to 17%. Non-GAAP operating margins were above the target range of 5% to 8% between fiscal year '21 and fiscal year '24 and more than doubled from 4.4% in fiscal year '21 to 10% in fiscal year '24 due to strong revenue growth and operating leverage. Q4 revenues were $5.31 billion, up 143% year-over-year and up 38% quarter-over-quarter and above the midpoint of guidance of $5.1 billion to $5.5 billion. Growth was driven by strong demand for next-generation air-cooled and direct liquid cooled rack scale AI GPU platforms, representing over 70% of revenues across enterprise and cloud service provider markets where demand remains strong. We exited the year with an acceleration in innovative DLC products, a large design win pipeline and a strong backlog, positioning us for continued growth in fiscal year 2025. We expect gross and operating margins to gradually increase in the year, driven by product and customer mix, manufacturing efficiencies for new DLC, AI GPU clusters and new platform introductions. As Charles discussed, shipments may continue to be constrained in the short term by supply chain bottlenecks for key new components for our advanced platforms. However, long-term gross margins will benefit from lower manufacturing costs as we scale up production in Malaysia and Taiwan, in addition to expansion in the Americas and Europe. During Q4, we recorded $1.83 billion in the enterprise channel vertical, representing 34% of revenues versus 49% in the last quarter, up 87% year-over-year and down 3% quarter-over-quarter. The OEM appliance and large data center segment revenues were $3.41 billion, representing 64% of Q4 revenues versus 50% in the last quarter, up 192% year-over-year and up 76% quarter-over-quarter. Emerging 5G/Telco/Edge/IoT revenues were $75 million or 2% of Q4 revenues. For fiscal year '24, enterprise/channel revenues grew 79% to represent 41% of total revenues. The OEM appliance and large data center segment grew 149% and represented 58% of total revenues. The emerging 5G/Telco/Edge/IoT segment represented 1% of total revenues. One CSP large data center customer represented approximately 20% of revenues for fiscal year '24. Server and storage systems comprised 95% of Q4 revenue and subsystems and accessories represented 5%. ASPs increased on a year-over-year and quarter-over-quarter basis, driven by the value and complexity of our rack-scale total IT solutions. By geography, U.S. represented 61% of Q4 revenues; Asia, 24%; Europe, 10%; and rest of world, 5%. On a year-over-year basis, U.S. revenues increased 94%; Asia increased 437%; Europe increased 128%; and the rest of world increased 386%. On a quarter-over-quarter basis, U.S. revenues increased 20%, Asia increased 66%, Europe increased 74% and rest of the world increased 187%. The Q4 non-GAAP gross margin was 11.3% versus 15.6% in Q3 due to product and customer mix, focus on winning strategic new designs with competitive pricing and higher initial costs in ramping production of new DLC AI GPU clusters. For fiscal year '24, the non-GAAP gross margin was 14.2% versus 18.1% for fiscal year '23. We have a path to improve gross margins to the target range of 14% to 17% as we introduce innovative platforms based on multiple new technologies from our strategic partners and improved manufacturing efficiencies on our DLC solutions. Q4 operating expenses on a GAAP basis increased by 15% quarter-over-quarter and 75% year-over-year to $253 million, driven by higher compensation expenses and headcount. On a non-GAAP basis, operating expenses increased 11% quarter-over-quarter and 39% year-over-year to $185 million. Q4 non-GAAP operating margin was 7.1% versus 11.3% in Q3 due to the lower gross margins. Other income and expense for Q4 was $11 million, consisting of $3 million in interest expense and $14 million from interest income on higher cash balances, offset by a loss from foreign exchange and other investments. Interest expenses decreased sequentially as we paid down short-term bank credit facilities. The tax provision for Q4 was $1 million on a GAAP basis and $21 million on a non-GAAP basis. The GAAP tax rate for Q4 was 0.3%, and the non-GAAP tax rate was 5%. The GAAP tax rate was 4.9% for fiscal year '24 versus 14.7% in fiscal year '23. And the non-GAAP tax rate was 10.4% for fiscal year '24 versus 15.9% in fiscal year '23. Q4 GAAP diluted earnings per share of $5.51 was below the guidance of $7.20 to $8.05. And non-GAAP diluted EPS of $6.25 was below the guidance of $7.62 to $8.42 due to lower gross margins and higher operating expenses in the quarter. The GAAP fully diluted share count increased quarter-over-quarter from 61.4 million to 64.2 million, and the non-GAAP share count increased sequentially from 62 million to 64.8 million shares, reflecting the effects of 2 recent stock offerings and the convertible bond offering. Q4 cash flow used in operations was $635 million compared to $1.52 billion in the previous quarter as inventory and accounts receivable grew due to higher levels of business and the timing of shipments. For fiscal year '24, cash used in operations was $2.5 billion due to strong revenue growth of 110% and working capital needs to support large customer design wins. Q4 closing inventory was $4.4 billion in anticipation of future growth. CapEx for Q4 was $27 million, resulting in negative free cash flow of $662 million for the quarter. CapEx for fiscal year '24 was $137 million, up $37 million from -- in fiscal year '23 as we invested in new property, plant and equipment globally, including our greenfield Malaysia plant. The Q4 closing balance sheet position was $1.7 billion, while bank and convertible note debt was $2.2 billion, resulting in a net cash position of negative $504 million versus a net cash position of $252 million last quarter. Turning to the balance sheet and working capital metrics compared to last quarter. The Q4 cash conversion cycle was 94 days versus 96 days in Q3. Days of inventory decreased by 10 days to 82 days compared to the prior quarter of 92 days. Days sales outstanding was unchanged at 37 days, while days payables outstanding decreased by 8 days to 25 days. Now turning to the outlook for Q1 fiscal year '25. We expect strong growth as we ramp new air-cooled and DLC AI GPU design wins with new and existing customers. For the first quarter of fiscal 2025, we expect net sales in the range of $6 billion to $7 billion. GAAP diluted net income per share of $5.97 to $7.66, and non-GAAP diluted net income per share of $6.69 to $8.27. We expect gross margins to improve sequentially due to product and customer mix and improving manufacturing efficiency. GAAP operating expenses are expected to be approximately $282 million and include $84 million in stock-based compensation expenses that are not included in non-GAAP operating expenses. The outlook for Q1 of fiscal year 2025 fully diluted GAAP EPS includes approximately $48 million and expected stock-based compensation expenses, net of tax effects of $35 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense to be a net expense of approximately $20 million. The company's projections for Q1 fiscal year '25 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 9.9% and a non-GAAP tax rate of 14.6% and a fully diluted share count of 65 million for GAAP and 66 million shares for non-GAAP. We expect CapEx for Q1 to be in the range of $45 million to $55 million. For fiscal year 2025, we are introducing guidance for revenues of $26 billion to $30 billion. Michael, we're now ready for Q&A. Harry?

[Operator Instructions] Our first question today is from the line of Michael Ng of Goldman Sachs.

I guess I have 2. Encouraged to see the revenue guidance for $26 billion to $30 billion for fiscal '25. I was wondering if you could just provide a little bit of color around the assumptions underpinning that revenue guidance and any visibility that you have in terms of backlog and some of the contingencies you might be assuming in terms of supply availability. And then secondly, I was just wondering if you could provide a little bit more color around the gross and operating margin improvement throughout the year. Should we think about the long-term gross margin targets as applicable for the full year as well or exiting the year?

I mean as what we share, I mean we continue to gain design wins, and -- which is also a new product available, including DLC liquid cooling and Datacenter Building Block Solutions, we see a lot of customer engagement and also more new customer like to engage with us. So with our capacity continue to grow, so $26 billion to $30 billion, that's our target for the next 12 months. And as to gross margin, as what we just mentioned, our DLC liquid cooling now have been very mature. So we are able to take advantage from that and also Datacenter Building Block Solutions that provides a much better value, improve customers' data center time to online and also ease customers job to build their data center. So all of those will increase our profitability gradually.

Our next question today is from the line of Samik Chatterjee of JPMorgan.

I have a couple as well. Firstly, maybe if I can start with the gross margin performance in the quarter. I know you mentioned you had a hyperscale customer, which impacted product customer mix and margin impact there. How should we think about sustainability or sort of repeat orders from that customer? It sounds like you're saying that's part of the improvement and you probably don't see as much repeat, but just wanted to confirm if that's how we should be thinking about the hyperscale customer you had, which is that it doesn't really repeat through fiscal '25. And I have a follow-up.

Yes. We have been very consistent -- I mean before we are Silicon Valley based, operations was in Silicon Valley. So we focus on enterprise, high-quality, higher performance customer only, that's before. But when we start to take production operation advantage from Taiwan, we start to grow large-scale data center customer. And now we have a huge capacity in Malaysia, where it will be ready by later this year. So with the economic large-scale advantage, we are waiting for large customer. So we will continue to grow with large customers. At the same time, we also continue to enhance our enterprise customer base. So recently, we also see the growth and the strong demand from our enterprise with our software total solution, I mean Datacenter Building Block Solutions, we start to gain more attraction for the data center, I mean, enterprise customers as well. So we believe long-term economic scale, the enterprise customer base and overall Taiwan and Malaysia advantage, cost advantage that we have a way to grow gross margin and [ net quality ].

Got it. And for my follow-up, Charles, there have been reports more recently about the delay of the GB200 from NVIDIA. Just wondering if you can share your thoughts on how that would impact the conversion of the robust backlog or pipeline that you're looking at to revenue through the year? And is that accounted for when you talk about liquid cooling now being a materially higher portion than what you talked about at COMPUTEX. Are you taking some of those delays into account?

Yes. I mean, yes, we heard NVIDIA may have some delay, right? And we treat that as a normal possibility. When they introduced new technology, new product, they always have a chance to push out a little bit. In this case, it pushed out a little bit. But to us, I believe we have no problem to provide the customer with a new solution like H200 liquid cooling. We have a lot of customers like that. So although we hope well deploying that schedule, that's good for a technology company, but this push out overall impact to us. It should be not too much.

Our next question today is from the line of Ruplu Bhattacharya of Bank of America Merrill Lynch.

I have 2 of them. The first 1 relates to the gross margin performance in the quarter. David, can you specify of the 430 bps sequential decline, how much was the result of the customer mix, which is the higher hyperscale customer mix versus the impact of ramping liquid cooling solutions? And how much was that impact to gross margins? And in terms of -- I think, Charles, you said that you lost about $800 million of revenue in the quarter because of nonavailability of components. Is that all liquid cooling related? Or was that related to other things like GPUs as well?

Pretty much liquid cooling key components related. But now it's much ready now. I mean, when we move to July, August, we have a much liquid cooling key components available now.

Ruplu, it wasn't a loss. It was pushed out into the next quarter. So there was -- we really -- we were surprised by the amount of demand that we had in this market. And so we -- our manufacturing efficiency improves -- has been improving every day. And so we expect that to continue, and that's going to help our gross margins going forward as we deploy liquid cooled racks at scale.

And is that deployment expected to be linear for these liquid cool racks throughout the year? Or is it more back-end loaded?

Basically, we support handful customers for liquid cooling. And most of them, once they try our liquid cooling, they will continue to deploy higher percentage with liquid cooling because not the cost -- the hardware acquisition cost is about the same, but they will save a lot of energy costs. So I believe this growth will be consistently growing.

Our next question today is from the line of Ananda Baruah of Loop Capital.

Charles, you said a lot of good stuff on this call. So I'll try to just ask about 1 or 2 things here. I guess to start, could you frame for us how the company is thinking about its liquid cooling capability relative to others who are providing liquid cooling service as well. That's been a big top of the conversation. It sounds like you guys are really high on your capability and it seems to be showing up at least in the guidance. But I think additional context around how you guys are competitively positioned and maybe some of the technical reasons why would be super useful. But I just have a quick follow-up.

Yes. Thank you. I mean as you know, liquid cooling has been in the market for 30 years and market share compared with overall data center size always small, less than 1% or close to 1%, I would have to say. But just June and July 2 months alone, we shipped more than 1,000 racks to the market. And if you calculate 1,000 racks, AI rack, it's about more than 15% on a global data center new deployment. So we are very happy. We are happy that the industry pushed from air cooling to liquid cooling and to help customer save energy costs and reduce carbon footprint. At the same time, because of liquid cooling, DLC liquid cooling data centers require 30% to 40% less power, that's why it's met customers' data center availability quicker because the customers don't have to wait for higher power [ passage ] from a powering company. So overall, we see among customers like our liquid cooling solution.

And Charles, did I hear you accurately that you guys think you did 50% liquid cooling share in the June quarter?

I believe for June and July in that 2 months, we may ship at least 70% to 80% liquid cooling compared with all the liquid cooling in the world. So for liquid cooling, we have at least 70% to 80% market share.

That's useful. And then just real quick, my follow-up is, you've made remarks earlier this year in the recent past about how you envision expanding your RAC capacity sort of over the -- sort of into the future. I was just wondering if you could give us an update on how to think about -- how you're thinking about rack capacity expansion for both liquid cooled and air cooled?

It's a very good question. I mean, last month, we have about 1,000 racks per month liquid cooling capacity. And today, we already grow another 50%. So now we have a 1,500 rack per month capacity. By this year-end, we will grow that to 3,000 rack per month. That's what liquid cooling alone. So we really believe liquid cooling is a much better choice for the market, and we provide kind of consultation to customers. And most of the customer when discussed with our engineering team, they love liquid cooling. And again, we are growing customer base for liquid cooling very strongly. And we're really happy for that because minimized power consumption have been common value to the world and especially save operation costs.

And that's fiscal year -- fiscal year, say, end of the year and the fiscal year?

For the next 12 months, I believe liquid cooling will be a big portion of our business.

Our next question today is from the line of Aaron C. Rakers of Wells Fargo.

Yes. I've got 2 as well. I guess I want to go back to the earlier question on Blackwell just because I think it's going to be a key focal point for a lot of investors here, especially as we kind of shape the full year guidance. So Charles, I want to be clear. So has your guidance contemplated as we think about the December quarter. Do you believe that you'll be shipping the Blackwell platform solutions for revenue in the December quarter? Or should we think about the full year guide is a bit more weighted to the back half of the fiscal year given some of these concerns around the timing of Blackwell availability and NVL 36 and 72 platforms, et cetera. I'm just curious of how you want us to say for the street to think about the cadence of that full year guidance shaping up on a quarterly basis? Appreciate you're not going to give quarter-by-quarter guidance.

Yes. Thank you. I mean, indeed, we are relatively very conservative. I understand Blackwell may postpone -- how much we don't exactly know because the new technology always what -- can be pushed out, right? So for Q3, for sure, we do not expect any Blackwell volume. For Q4, I mean December quarter, I guess, it will be very small. Engineering sample, small volume. So the real volume, I believe, had to be March quarter next year. And that's why we [ anticipate ] only $26 billion to $30 billion.

Yes. That's very helpful. And then as a quick follow-up, I want to go back to kind of the gross margin discussion too. We talked about the impact of direct -- the DLC platforms. You talked about product mix. One of the other comments, David, you had made was that winning strategic new customers was a factor in that 430 basis point gross margin degradation. Can you help us appreciate what exactly the impact of that has been? How that might have changed this last quarter? And then I'll flip my final one in. Any disclosure on purchase obligations coming out of this last quarter?

Thanks. I'll answer those in reverse order. We don't have any announcements in terms of purchase obligations, and so we'll point you to the 10-K for that. But with respect to your first question, I would say, we prepared the market for a downturn in margins or a softening of margins in our guidance last quarter. But even we were surprised by the acceleration that we saw in the liquid-cooled rack market. And so we had to ramp up our supply chain. We paid a lot of expedite costs and higher supply chain costs. So I think as the supply chain improves, we expect those efficiencies to now come back out, but that impacted us more than we had expected.

Especially for June quarter.

Is that the majority of the 430? Was that the majority of 430 basis points decline?

No. So half was targeting specific accounts like we announced last quarter. And the other half was really the higher supply costs that we encountered.

Our next question today is from the line of George Wang of Barclays.

I have 2 parts. Firstly, can you give more color just in terms of share gains, especially within the hyperscale arena? Traditionally, Supermicro has been more Tier 2, Tier 3 enterprise. And you guys talked about higher mix on hyperscale. Just curious, does that mean you guys are winning new penetration to the hyperscale space?

Yes. Again, David just mentioned, with our Taiwanese capacity is getting bigger and Malaysia capacity will be ready. So we're fully ready for large-scale data center customer, but we will be selective. So that's why we foresee only $26 billion to $30 billion. If we try to be more aggressive in a large scale, our growth can be even faster than that. But we try to grow in both ways, enterprise and large scale data center, the kind of -- try to balance so to maintain our healthier profitability.

Great. Just a second question, if I can squeeze in. Just as we enter the Blackwell era with liquid cooling kind of larger deployments, higher ASP, but also comes with some potential working capital need. Just in terms of the capital raise, is that fair to say you guys are sufficient or there could be some potential to come to the market? Just maybe you can talk about the puts and takes for the next 12 months.

Liquid cooling, I mean, for sure, is necessary and it's very helpful Blackwell solution, although Blackwell solution pushed out a little bit. But indeed, we never did liquid cooling for H100 and H200 as well, and a lot of customers are interested in our H100 and H200 liquid cooling now indeed. So liquid cooling to -- from our position, we'd like to support the whole data center, not just Blackwell.

Okay. Can you address on the working capital, if you can give any color on that?

Yes. So we announced a $500 million credit line with a group led by the Bank of America. And so we expect we are really working on our balance sheet and leveraging our balance sheet. And we expect to -- some announcements to be coming in terms of additional loan possibilities in the future.

Our next question today is from the line of Jon Tanwanteng of CJS Securities.

I was wondering if you could just talk -- given your time to market and volume capabilities and liquid cooling, the energy and computing advantages, can you walk through what your pricing strategy is and why not pass those costs on, especially relative to the value that you're providing? Is it a stronger competitive environment [Technical Difficulty] behind you? Or are you effectively trying to get ahead of them and get that share first?

Yes. I mean, indeed, the liquid cooling from our point of view, it is really a good value to the whole market and our whole planet because of less energy consumption, right? So we enable liquid cooling primarily for Blackwell because Blackwell higher power [ leverage ] -- lots of cases need liquid cooling. But we enabled that for H100, H200 and regular CPU as well. Because overall, liquid cooling once matures, once the economical scale is good enough, it's good for all different kind of computing. And not exactly now, we are deploying -- we are promoting, lot of our customer continue to interest in our liquid cooling even [ enough for ] Blackwell, frankly.

Got it. And then you mentioned getting back to the gross margin target range by the fiscal year-end. Can you help us narrow down a little bit more where in that target range you expect to be at the low end? Is it more towards the middle? Kind of help us understand how you're getting there?

Okay. For June, it's really a unique quarter because we deploy lots of liquid cooling and we pay lots of exploration for our cost. So that make up June gross margin much worse. But now, indeed, our liquid cooling technology have been getting very mature, and we have a high volume now -- so that -- though our liquid cooling costs are now. And however, we try to promote liquid cooling as a mainstream product solution. So we try not to add the value too much to customers. But instead, we try to gain market share and make liquid cooling everywhere.

Okay. And any color just on where in the margin range you expect to end up?

Well, so we -- I think if you look at the guidance that we gave for Q1, we expect to be above 12% in the first quarter. And we're doing -- we'll be working very hard to move back into the range, as we mentioned, as soon as -- as quickly as we can.

Especially with our commissioned Datacenter Building Block Solutions with more software, on-site deployment, maintenance and kind of end-to-end management service. So our profit margin should grow from a Building Block Solution for Datacenter very soon.

Our next question is from the line of Mehdi Hosseini of SIG.

I just have 2 housekeeping item. David, what kind of other income did you have in the June quarter. You did say that you had interest income of $12 million that you realized in the June quarter?

That was a net figure, Mehdi. So we actually had $20 million of interest income, but that was offset by some adjustments to -- some investment adjustments.

Whether I would share which -- for disclosing -- interest income. So the $20 million is that interest income...

$20 million was interest income, yes, from higher cash balances. That was offset by some investments.

And then a question I have for Charles. Obviously, you've done a good job of doubling revenue in fiscal year '24. But you also had a negative free cash flow of $2.6 billion. And if I were to look at the high end of your revenue guide for fiscal year '25, you're on track to double revenues again. Does that mean that you're going to need to burn another $2.5 billion to $2.6 billion of free cash flow to hit those revenue targets?

Not necessarily. I mean, if we try to be very aggressively growing market share, maybe -- for example, we forecast $30-something billion, right, so in that case, we may need more. But if we try to focus on below $30 billion, then not necessary.

And Mehdi, 1 thing I would add to that is we believe that we have NIG profile, and as such, like I mentioned earlier, we're starting to leverage our balance sheet more with targeting toward unsecured debt. And so that will help us on an inter-quarter basis.

Got you. What should I assume for fiscal year '25 CapEx?

No, we don't have -- we're not giving a guidance at this time.

Okay. But would it be down on a year-over-year basis since most of the expansion in Malaysia and U.S. are behind us?

Well, we have other projects going on -- expansion here in the U.S., but we'll -- nothing to announce today.

Our next question today is from the line of Nehal Chokshi of Northland Capital Markets.

I want to talk about DLC and some of the chatter that's been out there from some competitors in that. It sounds like failure rates for DLC, broadly speaking, not necessarily for Super Micro, is high relative to air cooled. Can you comment on what is Super Micro's DLC failure rates relative to air cooled and then also relative to other DLC solutions? And I guess maybe we can do it on a per-node basis, annualized failure rates or whatever basis you want to utilize?

Yes. We spent a lot on air cooled in last, I would like to say, 2 years to prepare our optimized DLC solution, including lots of new design, redesign, refining the components of the system. So finally, I mean, about May this year, right, we have our DLC solution for you ready. And we have more than handful, high-profile customers who really like our DLC solution. That's why we're deploying the solution to them and that's why we paid out on acceleration charge, right? But now the good thing is our whole DLC solution has been very mature and ready for really high-volume production. So now for any customer on DLC, we are able to support them quickly and with a much reasonable cost now. So looking forward, I mean, DLC, I believe, we'll be a really popular solution for the world because it's more efficient, especially energy saving. So we are very happy that we establish DLC solution much ahead of anyone else. Again, like June and July, I believe we have at least 70% or 80%, maybe even higher market share in the world for DLC. And air cooled, again, we have been -- have a very optimized air cooled solution. So we continue to promote air cooled solution for sure.

And do you have any thoughts on the actual like failure rates relative to air cooled and then relative to other suppliers DLC solutions?

Liquid as you know, because a very high efficient in cooling, right? So they allow CPU, GPU, other components running at a lower temperature. And then in lot of case, indeed, are able to optimize customers' data center performance by percentage -- a couple of percentage to even high single-digit percentage. So a lot of customers really like DLC at this moment.

So are you saying that you actually can achieve lower failure rates with DLC because you can run the GPUs at lower temperatures.

CPU, GPU and other components at a lower temperature that which you have the kind of the whole data center quality, uptime, availability time.

Okay. And then my follow-up question is that, I think June 21, you did an 8-K after market closed, leasing significant data center space from prime data center and then you're leasing it back to [ EndoLab ]. It seems like a rather odd arrangement. Can you guys talk about the purpose of doing this?

So we consider ourselves experts in data center solutions. And so this is really just 1 more facet of being a total provider.

And our next question is from the line of Thomas Blakey of Key Corp.

David, could you comment on the mix shift -- mix rather of AI rack scale revenue here in the quarter? Was it -- did it increase quarter-on-quarter in the June quarter?

Absolutely. I mean, our revenues went up -- over a $1.5 billion, and that was primarily driven by liquid cooled racks.

Excellent. And an update maybe on the capacity utilization, did that increase as well or decreased? And relatedly to that, you commented last quarter that there would be a number, I think about 1,000 rack per month going out at a 64 GPU configuration. Could you give an update in terms of -- did you fit those to the 3 customers? One was new in the June quarter. And again, an update on the capacity utilization related to that question.

Yes. Customers like our high density computing solution, especially [ pro rata, that's why you say ], GPU or more GPU, right? So we are very efficiently provide the customer for whatever configuration they like. And very soon we were [indiscernible] even better, for sure.

So to be clear, is that a yes that you shipped 3,000 racks during the quarter at that configuration to those 3 customers?

We are building that capacity for that because how many customers will move to DLC, especially when Blackwell ready. So we are pretty optimistic for that, especially after Blackwell in high volume production. And we have many Blackwell ready optimized system and rack scale design.

Yes. But Thomas, the 1,000 per month was the capacity. We're not saying that we shipped 1,000 per month. But 1 thing I can tell you is that the efficiency, yes.

Thank you. And we have run out of time for any further questions. So this will conclude the Super Micro Computer, Inc. Q4 2024 Earnings Call. Thank you to everyone who is able to join us today. You may now disconnect your lines.