Q1 FY2022 Earnings Call
SMCI · Preprocessing Report
2021-11-02
Quality
100%
88
Turns
10
Speakers
4
Sections
7
Exchanges
453
Claims

Entities by group 31

integrated IT solutions 1
Total IT Solutionproduct
rack-scale solutions 1
Plug-n-Play Rack-Scaleproduct
automation software 3
Command Center Based Auto configuratortechnologyB2B AutomationtechnologyB2B auto-configuratortechnology
enterprise components 1
CRMproduct
ai cloud offerings 1
AI Cloudproduct
modular solutions 1
Building Block Solutionsproduct
onboarding programs 1
JumpStart Programproduct
cloud infrastructure services 1
Cloud Infrastructuretechnology
total solutions 1
AI Total Solutionproduct
Ungrouped 20
Super Micro ComputercompanyCharles LiangpersonDavid WeigandpersonJon LopezpersonNehal ChoskipersonJon TanwantengpersonAaron RakerspersonMehdi HosseinipersonSIGcompanyAnanda BaruahpersonIntelcompanyAMDcompanyNVIDIAcompanyPAotherBroadcomcompanyFAEotherPMotherTelcootherBank of AmericacompanyTSMCcompany
REPORTING 90PROJECTING 34POSITIONING 107EXPLANATORY 15ANALYST 74

Topics 82

revenue×52inventory×16earnings×14gross margin×14customer×12freight×11server×10supply×10margin×9capacity×9demand×8solution×7pricing×7operating×6market×5growth×5order×5vertical×5cash×4share×4

Themes 261

guidance×10supply chain×5asia growth×5u.s. decline×4target×3taiwan expansion×3incremental×3capacity×3balance sheet×3ai-optimized×3leveling off×3down in q2×3quarterly growth×2year over year growth×2gains×2quarterly result×2above $1 billion×2above guidance×2transformation×2total it×2year over year increase×2u.s. growth×2margin improvement×2tax rate assumption×2shortage×2growth drivers×2customer demand×2improvement×2lead times×2targets×2pricing and units×2oem and oem appliance×2sequential increase×2auto-configure and b2b opportunity×2annual target×1customer-driven growth×1industry outperformance×1non-gaap q1 fy2022×1regional growth×1year-over-year growth×1taiwan capacity and cost×1founding and products×1customer mix×1vertical markets×1subsystems and components×1partner co-development×1ai and cloud rack-scale×1service and switch products×1business growth×1growth focus×1r&d expansion×1profitability improvement×1sales automation×1support system×1system improvement×1automation tools×1sales and customer service×1continuous upgrade×1total solutions strategy×1quality and validation×1plug-and-play connectivity×1faster installation×1modular design and lower complexity×1system building block×1jumpstart×1preconfigured×1hosted instances×1customer enablement×1it solutions transition×1green solution for enterprise cloud ai and telco×1product and technology leadership×1geographic expansion×1automation adoption×1automation-driven gains×1business progress×1growth opportunity×1annual goal×1diversified growth×1sales drivers×1geographic strength×1organic enterprise and channel ai/ml×1oem appliance and large data center×15g/telco and edge/iot×1revenue mix×1higher average selling prices×1europe growth×1rest of world growth×1europe decline×1rest of world decline×1non-gaap basis×1quarterly decline×1cost pressure×1year over year decline×1freight and supply chain costs×1gaap quarterly increase×1non-gaap quarterly increase×1personnel cost driver×1interest expense×1fx impact×1provision×1rate×1joint venture×1margin and expense drivers×1from operations×1ahead of strong quarter and supply chain mitigation×1capital expenditures×1cash uses×1cash and debt×1production ramp×1working capital pressure×1working capital drag×1days on hand×1collection cycle×1payment cycle×1gaap guidance×1stock compensation and other expenses×1net expense guidance×1contribution guidance×1rising r&d and personnel costs×1diluted share assumption×1stock-based compensation×1diluted assumptions×1gaap outlook×1quarterly guidance×1broadening across business×1large enterprise accounts×1pipeline mix×1broader opportunities×1b2b automation×1internal efficiency×1bandwidth for engagement×1taiwan production and revenue context×1asian production×1u.s. costs×1taipei campus×1taiwan utilization×1asia cost advantage×1regional customer support×1taiwan shift×1taiwan facility utilization normalization×1taiwan plant×1additional utilization×1line of credit×1credit lines in taiwan×1asia promotion×1asia distribution×1europe support from asia×1asia focus×1geographic investment×1u.s. focus×1mix by bucket×1asia end market strength×1asia ai and 5g/telco×1strong guidance×1global issues×1base inventory levels×1inventory and sourcing×1growth support×1component shortages×1delivery delays×1delays×1direct sales×1shortages×1problems×1issues×1recovery timeline×1improving conditions×1regional performance×1seasonality×1recovery after digestion×1constraints×1pressure×1pass-through of higher component costs×1customer pass-through effectiveness×1price decline×1supply improvement×1price increases×1cost increases×1customer pricing strategy×1passthrough to customers×1customer acceptance×1business visibility beyond next quarter×1fulfillment delays×1order timing×1customer transparency×1strong demand×1strategic positioning×1materiality×1gpu-based platform size×1gpu-based platform growth×1ai machine market×1ai machine growth×1ai deployment×1customer productivity×1ai cloud shipments×1deep learning and video streaming×1working capital build×1steady state level×1seasonally strong december×1ahead of supply chain delays×1build for strong december quarter and supply chain timing×1production and shipping delays×1funding×1commitment level×1commitment disclosure×1quarterly disclosure×1annual disclosure×1jumped higher×1double-digit increase×1reason for increase×1customer prepayments and service deferrals×15s business focus×1trajectory×1transportation expense increase×1prior-quarter increase×1improving guidance×1cost inflation×1cost increase through fiscal q1×1increase×1basis point increase×1company commentary×1pricing and volume assumptions×1fiscal 2022 growth outlook×1pricing versus unit mix×1wrap-up×1breakout across segments×1year-over-year trend by segment×1growth tracking×1year-over-year comparisons×1quarterly trend disclosure×1customer base mix×1concentration×1vertical mix×1configurator system×1risk mitigation×1configurations×1building block solutions demand×1lower expense×1increased expense×1q1 decline×1timing correction×1quarter and outlook×1source of improvement×1pricing and inflation×1cost efficiencies×1mix improvement×1auto-configurator and channel traction×1discipline×1cost pass-through×1sales advantage from auto-configure and b2b×1growth contribution from auto-configure and b2b×1long-term strategy×1manual process×1customer configuration service×1satisfaction and efficiency×1midterm and long-term growth×1channel sales comparison×1comparison×1b2b auto-configurator×1middle-sized enterprise accounts×1data×1

Key Metrics 62

revenue×52gross margin×18inventory×10freight costs×7margin×6diluted eps×6operating expenses×5revenue growth×5market share×4other income and expense×3diluted net income per share×3capacity utilization×3lead time×3backlog×3demand×3purchase commitments×3inventory commitment×3freight cost×3sga expenses×3earnings per share×2cash×2net sales×2design wins×2pricing×2shipments×2profitability×2bonus×2growth rate×1deployment time×1units shipped×1average selling price×1tax provision×1tax rate×1share of income×1cash flow from operations×1free cash flow×1working capital×1share repurchases×1cash conversion cycle×1days inventory outstanding×1days sales outstanding×1days payables outstanding×1contribution×1operating expense×1diluted share count×1share count×1net income per share×1capex×1utilization rate×1credit×1line of credit×1credit lines×1credit capacity×1orders×1forecast×1delivery×1credit line×110-k×1sg&a×1personnel cost×1price×1freight charges×1

Entities 590

Super Micro Computer×302Charles Liang×94David Weigand×84Jon Lopez×17Nehal Choski×15Jon Tanwanteng×11Total IT Solution×10Aaron Rakers×7Mehdi Hosseini×6SIG×6Ananda Baruah×5Plug-n-Play Rack-Scale×3CRM×3AI Cloud×3Building Block Solutions×3Intel×2AMD×2NVIDIA×2JumpStart Program×2PA×2Broadcom×1FAE×1PM×1Cloud Infrastructure×1Command Center Based Auto configurator×1B2B Automation×1Telco×1Bank of America×1TSMC×1AI Total Solution×1B2B auto-configurator×1

Business Segments 10

Asia×3Americas×3Europe×2Rest Of World×2

Sectors 50

semiconductor×10it services×9cloud computing×8telecommunications×6server hardware×4automation software×2ai computing×2industrial×1networking×1manufacturing×1data center×1internet of things×1edge computing×1high performance computing×1business process automation×1video streaming×1

Regions 61

Asia×18Taiwan×14U.S.×12EMEA×4Europe×3APAC×2Rest of World×2Japan×1United States×1globally×1Bay Area×1Taipei×1global×1

Metadata Distributions

Sentiment
positive 123negative 47neutral 150
Temporality
backward 97forward 62current 161
Certainty
definitive 92confident 96moderate 84tentative 47speculative 1
Magnitude
major 70moderate 188minor 62
Direction
improvement 35decline 14mixed 2none 269
Time Horizon
immediate 93near_term 125medium_term 33long_term 4unspecified 65
Verifiability
quantitative 98event 16qualitative 206
Analyst Intent
probing 28confirming 11seeking_detail 34seeking_guidance 1

Speakers

Executives
CLCharles LiangCEODWDavid WeigandCFO
Analysts
ARAaron RakersanalystABAnanda BaruahanalystJLJon LopezanalystJTJon TanwantenganalystMHMehdi HosseinianalystNCNehal Choskianalyst
Other
NNNicole NoutsiosirOPOperatoroperator

Sections

TypeLabelSpeaker
preamblePreambleNicole Noutsios
prepared_remarksPrepared RemarksCharles Liang, David Weigand
qa_sessionQ&A Session—
closing_remarksClosing RemarksCharles Liang

Q&A Exchanges 7

#AnalystFirmTurns
1
ABAnanda Baruah
Loop Capital9
2
MHMehdi Hosseini
SIG12
3
NCNehal Choski
Northland Capital Markets6
4
ARAaron Rakers
Wells Fargo11
5
JLJon Lopez
Vertical Group24
6
NCNehal Choski
Northland Capital Markets11
7
JTJon Tanwanteng
CJS Securities9

Claim Taxonomy 320

REPORTING90
resultFinancial outcome for a completed period69
metricNon-financial quantitative fact8
operationalDiscrete completed event13
PROJECTING34
guidanceQuantitative expectation with number + time26
commitmentPromise with binary verifiable outcome7
targetLong-term aspirational quantitative goal1
POSITIONING107
strategyPriority, direction, or initiative82
competitiveCompany's position or advantages2
opportunityMarket condition framed as growth driver7
riskHeadwind, constraint, or uncertainty16
EXPLANATORY15
attributionWhy a specific outcome happened11
contextNon-company macro/industry fact4
FRAMING0
thesisFalsifiable belief about how the world works0
ANALYST74
questionInterrogative seeking information51
observationRestates a fact or data point19
concernFlags a risk or challenge0
estimateAnalyst's own projection or calculation0
sentimentOpinion, praise, or critique4

Transcript

Preamble
OP
Operatoroperator
Ladies and gentlemen, thank you for standing by, and welcome to Super Micro First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Nicole Noutsios, Investor Relations for Super Micro. Please go ahead.
NN
Nicole NoutsiosirSuper Micro Computer, Inc.
Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the first quarter, which ended September 30, 2021. 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 IR 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 second quarter of fiscal year 2022 and the full fiscal year 2022, and the potential impact of COVID-19 on the Company's business and results of operations. 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 2021, 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 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 to ask questions.
With that, I'll now turn the call over to Charles Liang, Founder, Chairman and Chief Executive Officer. Charles?
Prepared Remarks
CL
Charles LiangCEOSuper Micro Computer, Inc.
Thank you, Nicole, and good afternoon, everyone.
I am pleased to announce that our quarterly revenue exceeded $1 billion even during a traditional weak September quarter. For fiscal Q1 2022, we delivered strong year-over-year revenue growth of 35%. We continued to gain market share and are exciting well against — and executing well against our plan to achieve $10 billion in annual revenue. The revenue growth was driven by strong progress across many key customers with our Total IT Solution strategy.
Now, let's look at some highlights from the quarter. First, our first quarter net revenue totaled $1.03 billion. It's our second consecutive quarter of $1 billion plus in revenues, up 35% year-on-year and down 3% quarter-on-quarter, exceeding our guidance of $900 million to $980 million. Our efforts continue to enable our growth trajectory at multiple times the average industry growth rate. Our fiscal first quarter non-GAAP earnings per share was $0.58, compared to $0.55 in the same period one year ago and higher than our guidance of $0.28 to $0.48. All our major geographies contributed significant year-over-year growth with the APAC region including Japan doubling Year-over-year. The newly completed Taiwan expansion at Bade is greatly helping our Asia and EMEA growth momentum by providing additional capacity and lowering operational cost. These results show that we remain on track to achieve our $10 billion revenue target as we previously shared.
We started our business with the best system building block solutions on the market 28 years ago. After many years of servicing the System Integrators and Value-Added Resellers, we began to offer application-optimized complete systems to direct partners including many appliance partners, OEM and large enterprise accounts. In the past 10 years, we have continued to expand and began our business transition from a hardware solutions company to a Total IT Solutions company that combined hardware, software, service and more features. With application optimized total IT solutions for many vertical markets and a much broader technology footprint today, we are redefining our growth drivers to speed up our growth strategies. First, Sub-system and Components, we will continue to offer server motherboards, enclosures, barebones and accessories to the market to continue help growing our market share. Second, Complete Systems, we will continue to fully focus and expand on growing our complete hardware systems with technologies co-developed with our key partners including Intel, AMD, NVIDIA, Broadcom, and others. And third, Total IT Solutions, we are accelerating our broad development of Appliance and Plug-n-Play Rack-Scale Solutions for AI, Machine Learning, Industry Automation, IoT, 5G/Telco and Cloud products.
And number four, 5S. We are finally ready to aggressively promote our Software, Service and Switch Product lines. And I will share more about the other two S when they are ready.
Our building blocks and completed systems business have been steadily growing over the decades, and they serve as the backbone of our revenue growth. With more enterprise customers and appliance partners engagements, our Rack Scale, Total IT Solutions business is our new major growth focus now. To make our Total IT Solutions a seamless experience for our customers, we have been increasing our R&D resource to focus on many software products, service, and networking for many years. These products, as higher value parts of our Total IT solutions, will be the key to improve our margins and profitability in the coming quarters and years. Our new online auto-configurator together with new B2B program are now driving our business growth more efficiently than ever before.
Our innovative new command-center based customer service system have been greatly helping our sales, FAE, PM as well as our key customers. They are dramatically improving our business interactions with customers much faster, much accurate, more optimized and more customer friendly while reducing manpower, human delay and error. Our new intelligent database driven tools are indeed performing much smarter and faster than human efforts in most areas. This automated-intelligent system is servicing our salesforce and customers to their great satisfaction now, and it will be constantly upgrade and update. Our push toward Total IT Solutions is benefiting Super Micro and our customers in multiple ways. Most importantly, our customers will receive higher-quality products that are fully optimized, integrate and validate in-house. For the PnP, Plug-n-Play Rack-Scale products, our customers just need to connect network and power cables. And then relative to run the application. This shrinks their deployment time from many weeks to just a few hours.
The Total IT Solutions is also helping Super Micro and our customers to mitigate the impact of the global shortage supply chain disruptions by accurately forecasting, building inventories in scale and prioritizing with our strategic partners. The system building block solution allows us to utilize sets of common sub-systems and components to create, design and deliver first-to-market products with reduced manufacturing and supply chain complexity and risk. This will dramatically improve our customer's time-to-market, which is critical to their success. The Total IT Solution is indeed a win-win-win proposition for Super Micro, our customers and our supply chain partners.
Customers can get a taste of our Total IT Solutions now by signing up for our new JumpStart Program. They can remotely run their software and applications on our customer, preconfigured, pre-validated racks powered by the latest technology from Intel, AMD processors and NVIDIA. We are also providing hosted instances of plug and play Cloud Infrastructure with operating systems and other tools that can be accessed remotely for development and testing. The program will instill more confidence in Super Micro customers as it delivers the convenience, faster time to market, performance optimization, cost savings and security. In summary, Super Micro is rapidly growing and is transforming into a Total IT solution company from a server hardware company. In addition to providing the greenest hardware total solution, our software, switch and service products are now ready for any large enterprise, cloud, AI and Telco customers. We are building on and expanding our successful product and technology leadership. Our new growth factors, including the Total IT Solutions and the fast-growing 5S product lines, are keys to achieving our $10 billion revenue target with higher profitability. And third, replicating our market share success in the U.S. to APAC and EMEA with the completion of our new APAC campus in Taiwan. And fourth, our new Command Center Based Auto configurator and B2B Automation platforms are getting broadly used by customers around the world now, and they are accelerating our market-share gains and customer satisfaction.
In closing, I am getting much happier with the progress of our business transformation, which is resulting in an acceleration of our business in fiscal 2022 and beyond. As a Total IT Solutions company, our TAM continues to increase as we invest our resources for growth, and I am optimistic about achieving our $10 billion annual revenue goal in a much sooner schedule. With that, I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional detail. Thank you.
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DW
David WeigandCFOSuper Micro Computer, Inc.
Thank you, Charles. We continued to experience diversified growth across our key market verticals, exceeding $1 billion in revenue for the quarter, above the high end of our guidance range. This is the second consecutive quarter that revenues have exceeded $1 billion. Revenue growth was driven by sales to large enterprise, cloud, AI, and Telco markets, continued strength across all geographies and strong demand for our products and services. Our fiscal first quarter revenue totaled $1.03 billion, reflecting a 35% year-on-year increase and a 3% decrease on a quarter-over-quarter basis. Looking at Super Micro's Q1 revenue in our three market verticals, we achieved $725 million in the Organic Enterprise and Channel AI/ML vertical, $250 million in the OEM appliance and large data center vertical, and $58 million in the 5G/Telco and Edge/IoT vertical. Systems comprised 82% of total revenue and the volume of systems and nodes shipped were up year-over-year.
System node ASPs increased year-over-year and quarter-on-quarter. On a year-on-year basis, Asia increased 108% as we saw continued growth with both existing and new customers, Europe increased 60%, U.S. increased 13% and Rest of World increased 6%. On a sequential basis, Asia increased 29%, U.S. sales decreased 14%, Europe decreased 3%, and Rest of World decreased 1%.
From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q1 gross margin was 13.4%, down 30 basis points quarter-over-quarter from Q4 due to higher freight and supply chain costs as was also reported by many other companies around the world. On a year-over-year basis gross margins were down 370 basis points due to a discrete cost recovery event in Q1 of last year, while also incurring higher freight, supply chain and other costs in Q1 of the fiscal year 2022.
Turning to operating expenses, Q1 OpEx on a GAAP basis increased 2% quarter-on-quarter and 10% year-on-year to $109 million. On a non-GAAP basis, operating expenses increased 2% quarter-on-quarter and increased 7% year-on-year to $101 million. The year-on-year and quarter-on-quarter increases on a GAAP and non-GAAP basis were driven primarily by higher personnel expenses due to increased headcount, especially in Asia. Other Income & Expense including interest expense was a $0.8 million expense as compared to a $2.1 million expense last quarter. The sequential change is mostly related to FX. This quarter the tax provision was $3.3 million on a GAAP basis and $6.2 million on a non-GAAP basis. Our non-GAAP tax rate was 16.6% for the quarter. Lastly, our share of income from our JV was $0.4 million this quarter as compared to $0.6 million last quarter. Q1 non-GAAP diluted earnings per share totaled $0.58, which was higher than our mid-point guidance of $0.38 due to higher revenues, and lower operating expenses, offset by lower gross margins. Cash flow used in operations was $134.6 million compared to cash flow generated from operations of $63.6 million in Q4 as we built inventory ahead of a seasonally strong December quarter and positioned ourselves to mitigate the impact of supply chain disruptions. CapEx totaled $11.9 million resulting in free cash flow consumption of $146.5 million. Key uses of cash during the quarter included increases to inventory, payments made to reduce accounts payable offset by an increase in deferred revenue. We did not repurchase any shares in the quarter. Our closing balance sheet cash position was $270 million, while bank debt was $279 million as we drew down on our bank lines of credit to increase inventory as we ramped production of new platforms globally.
Turning to the balance sheet and working capital metrics compared to last quarter, our Q1 cash conversion cycle was 94 days, up from 80 days, above our target range of 85 to 90 days due to higher inventories. Days of inventory was 114, representing an increase of 18 days versus the prior quarter. Days Sales Outstanding was up by 4 days to 41 days, while Days Payables Outstanding was up by 8 to 61 days. Now turning to the outlook for our business.
We expect net sales in the range of $1.1 billion to $1.2 billion. GAAP diluted net income per share of $0.60 to $0.80 and non-GAAP diluted net income per share of $0.70 to $0.90 for the second quarter of fiscal year 2022 ending December 31, 2021. We expect gross margins to improve as we manage supply chain costs and maintain price discipline. Over the upcoming quarters, we continue to expect to achieve margins within our target model as we further scale our Taiwan operations and begin to gain traction from our new product offerings and auto configurator B2B/B2C solutions. GAAP operating expenses are expected to be approximately $112 million and include $7 million in stock option compensation expenses and $1 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense, to be a net expense of roughly $1.5 million and expect a nominal contribution from our JV. Our non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D and higher personnel costs. The company's projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 53.5 shares for GAAP and 55 million shares for non-GAAP. The outlook for Q2 of fiscal year 2022, GAAP diluted net income per common share includes approximately $8 million in expected stock-based compensation and other expenses, net of tax effects, that are excluded from non-GAAP diluted net income per common share.
We are raising our guidance for the fiscal year 2022 ending June 30, 2022, and now expect net sales in a range of $4.2 billion to $4.6 billion versus our prior forecast of $4.1 billion to $4.5 billion. GAAP diluted net income per share is expected to be at least $2.77 versus our prior forecast of $2.60. And non-GAAP diluted net income per share of at least $3.20 versus our prior forecast of $3.
The company's projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 54.1 million shares for GAAP and 55.6 million shares for non-GAAP. The outlook for fiscal year 2022 GAAP diluted net income per common share includes approximately $33 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal second quarter of 2022 to be in the range of $3 million to $5 million. I'll turn it back over to you now, Nicole.
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Q&A Session
Q&A 1/7
OP
Operatoroperator
The floor is now open for your question. [Operator Instructions] Your first question comes from Ananda Baruah of Loop Capital.
AB
Ananda BaruahanalystLoop Capital
Hi guys. Yes, listen. Good afternoon. Congrats and thanks for taking the question. I guess, a couple for me, just to start off, could you talk about, it seems like you're highlighting both in the press release and then in your remarks new design wins and speaking of them, broadly that there across the business. Could you maybe talk to what you saw that was — those exciting for you and most incremental to the business throughout the quarter. And then I have a couple of follow-ups. Thanks.
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CL
Charles LiangCEOSuper Micro Computer, Inc.
Yes. Thank you. A very good question. Yes, I share in last few quarters, we started engage more and more large enterprise account. And we, again, it's even more than handle for a larger account in last few quarter, including 5G/Telco, including AI machine learning and including HPC as well.
So pretty much across broader range. We have a more customer and with our B2B automation, auto congregator to I just mentioned. Now we are able to have sales engineer and PA to communicate with customer much more efficiently. So now we have a more bandwidth to talk to more customer, talk more customer's application in more detail. So I do — we are contained again, customer and again design win.
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AB
Ananda BaruahanalystLoop Capital
That's helpful context, Charles. Thanks. And how would you characterize, I guess, the — I don't even know, if I want to call it progress with the new Taiwan facility. Could you just describe for us the appropriate, like, the appropriate context of that we can understand, what the operation feels like right now both from a production perspective, but also from a revenue generating perspective as well.
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CL
Charles LiangCEOSuper Micro Computer, Inc.
Yes. Thank you for the question. Yes.
As I share with — we see in last few quarter, Asian campus production capacity is very important to our business. In USA, especially, our operation have been pretty much focused on our pay area and that's 28 years and it really cost too high. So we are very happy finally, we have a big campus in Taipei, Taiwan, and now we have big capacity ready. Indeed, we — today, we just utilize about less than 30% of our capacity. So we have cheaper capacity available in Asia now. So we are very happy and we are a start to a very aggressively engaged customer in Asia and EMEA or even leverage Taiwan, the capacity to support a customer in USA. So that's a very positive changing to us.
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Ananda BaruahanalystLoop Capital
How long Charles, any estimate on, where you'll get kind of normalized capacity utilization in the Taiwan facility?
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Charles LiangCEOSuper Micro Computer, Inc.
Okay, good.
Because of our global shortage, otherwise our revenue must be much bigger than Taipei. We alarmed at $1.03 billion this quarter, because we're always shortage otherwise that much should be much bigger.
So at this moment, our iteration rate in Taiwan is about 30% or a little bit bad. And we expect once the global shortage program to this, we will use unpaid to 80% to 100% capacity in Taiwan almost in a few quarters. So we have a very strong demand and just need a supply chain to be improved.
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Ananda BaruahanalystLoop Capital
That's really helpful, Charles. I appreciate it. I'll get back into the queue. Thanks a lot.
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Charles LiangCEOSuper Micro Computer, Inc.
Thank you.
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Q&A 2/7
OP
Operatoroperator
Your next question comes from Mehdi Hosseini of SIG.
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Mehdi HosseinianalystSIG
Yes. Thanks for thinking my question. A couple of follow-ups on — regarding the balance sheet and cash flow, can you remind me how much more alone a credit you have that you can utilize?
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David WeigandCFOSuper Micro Computer, Inc.
So we have a $200 million line of credit with the Bank of America, and we also have over $300 million in Credit Lines in Taiwan as well.
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Mehdi HosseinianalystSIG
Okay. So after a total of $500 milllion, that's I know with this being neutralize, right?
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David WeigandCFOSuper Micro Computer, Inc.
Yes. So we've — as you see from our balance sheet, we're sitting at about $279 million.
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Mehdi HosseinianalystSIG
Got you. Okay. And then regarding the growth, can you maybe, Charles or anybody else from the team help me understand? What would the key growth drivers in Asia more than double on a year-over-year basis and the U.S., which is the largest market had a double digit growth, but Asia was up double digit. What were the key drivers behind that growth?
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Charles LiangCEOSuper Micro Computer, Inc.
Yes.
Indeed, in Asia, we did not have really strong promotion before, because our capacity before it was limited in Asia. And most of the time, we had to ship the port out from USA to customer in Asia, that was our business before. Now we saw Taiwan capacity much, much bigger maybe. So we are very aggressively approaching customer in Asia and these are not just in Asia, in support European customer from Asia, also very good arrangement. And we start to focus kind of our sales force in Asia. So that's a major reason, and we will continue to invest more as sales marketing team in Asia and EMEA as well as in East Coast, indeed in USA, East Coast will be a very sweet spot for us as well. And we just have a strong team as not to focus on U.S. is cost now.
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Mehdi HosseinianalystSIG
Yes, perhaps maybe if I rephrase the question, you highlight the three buckets of revenue, organic and organic enterprise OEM and the Telco. Was there any particular end market that was particularly strong in Asia?
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Charles LiangCEOSuper Micro Computer, Inc.
AI, for example, and Telco — 5G/Telco, for example, and in either because our Asia market share was a small before, so basically we have a lot of norms to grow in Asia.
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Mehdi HosseinianalystSIG
Got it. Thank you.
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Charles LiangCEOSuper Micro Computer, Inc.
Thank you.
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Nicole NoutsiosirSuper Micro Computer, Inc.
Next question, please.
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Q&A 3/7
OP
Operatoroperator
Your next question comes from Nehal Choski of Northland Capital Markets.
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Nehal ChoskianalystNorthland Capital Markets
Yes. Thank you. And fantastic results and very strong guidance, great feedback. A couple of questions for me. Charles, what's your perspective on whether the worst of global supply chain issues have passed or not. And then related to that, how long do you think it will be prudent to continue carrying more base inventory than typical?
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Charles LiangCEOSuper Micro Computer, Inc.
Very good question and a big question. As you know, we usually keep about $900 million in mentoring and now grow to almost $1.3 billion. So the reason why we grow inventory so quickly, because we want to make sure we are doing our best to support the customers and to support our growth. So we continue to improve our relationship with out supply chain, and it's really a big shortage, especially in chips like those I/O chip, especially, a small chip like what I mentioned before. In some CPU shortage as well, CPU some slow delivery as well.
So we are facing to lots of logistics delay and however because we are providing IP total solution now. So we taking care all our difficulty portion and keep complete pattern play direct solution to our customer. So most our customer now are very appreciate, direct scale total solution. And we just had to continue working with our supply chain to enable those shortage item. And how soon can we fix those problems. It's really a global problem. So people included myself, I guess maybe at least in three months to four months. And hopefully, of the day, things will be improving.
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Nehal ChoskianalystNorthland Capital Markets
Great. Thank you for that perspective. And then following on Mehdi's question regarding regional performance, helpful on what's driving Asia. David, you did say that U.S. was down 14% Q2. Is that seasonal? Or is there something more going on there?
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David WeigandCFOSuper Micro Computer, Inc.
I think it's simply just a matter of digestion. We had some large, very large purchases, and there was some digestion of those purchases, and we expect those to return.
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Nehal ChoskianalystNorthland Capital Markets
Got it. All right. I'm going to get back in the queue. You addressed some good questions as well. Thank you.
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Q&A 4/7
OP
Operatoroperator
Your next question comes from Aaron Rakers of Wells Fargo.
AR
Aaron RakersanalystWells Fargo
Yes. Thanks for taking my questions and also congrats on the quarter and the guide. Just kind of dovetailing off the component question. Everybody is definitely seeing supply constraint. I guess my question on that is, can you comment on what you're seeing from a pricing perspective of some of the key components in the supply chain, be it memory or other components? And what you're doing to maybe pass-through some of that pricing? Or how effective you've been there?
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Charles LiangCEOSuper Micro Computer, Inc.
Yes. I mean, as you may know, right, CRM price is dropping now since last month, so maybe two months ago. So CRM supply is getting a much better position than before. So other than CRM and most of the other components, still have a big shortage. And we foresee some IC price will continue going up. As you know, even TSMC November 1, some of their product line cost will increase to their customer. So overall, I feel — seen some improvement, but won't be right away.
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Aaron RakersanalystWells Fargo
And how are you reacting with your own pricing?
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Charles LiangCEOSuper Micro Computer, Inc.
We basically pass-through to our customer whatever we can, and customer is getting used to this model because we just cannot afford to get so much price rise. This year, the customer pretty much understand that.
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Aaron RakersanalystWells Fargo
Yes. In this environment, a lot of companies have seen — are requested maybe their own customers to provide longer lead times on their own purchase commitments. Have you also asked your customers to lengthen out their lead times and, therefore, given you more visibility in the business beyond maybe just this next quarter?
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Charles LiangCEOSuper Micro Computer, Inc.
Yes. Basically, we hope so. But the problem is we cannot deliver even our back order today. So that's why we did not push customers to predict order much earlier, but we hope they can more transparent to us about their forecast, about their IPO, yes, for sure. But again, the current back orders indeed have been a big demand, and we had to fulfill there as soon as possible.
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AR
Aaron RakersanalystWells Fargo
Yes.
And then the final question, just kind of strategically, I'm curious about is, I think the company is fairly well-positioned given your engineering presence and breadth around the role of AI and the proliferation of AI from a compute layer perspective. Can you help us appreciate how material, AI is?
I'm assuming that server platforms that are incorporating a GPU predominantly, how big that business is? How fast it's growing? And any kind of thoughts at a high-level? How much that changes the weakness of the mix of your business on a AI-optimized server relative to more of a traditional server?
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Charles LiangCEOSuper Micro Computer, Inc.
Yes. AI-optimized server for so is high-value, high performance, high-value, and we are very aggressive to continue to grow our AI machine. Indeed, our AI machine, including complete system and some payable, I believe our market share still pretty much top one or top two. I hope top one, and I believe will be continue to grow very strongly because we have been focused so much on those high-end products, including a Total Solution, right, AI Total solution.
We start to ship kind of AI Cloud to some of our partner. Again, that makes our customers' job much easier. So when we ship that direct to customers, customers are able to get targeting networking cable, power cable and pretty much ready to run their applications. So with Total AI Cloud, Total AI solution, I am very optimistic that our deep learning AI machine, even including a video streaming solution will continue to grow very fast.
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Aaron RakersanalystWells Fargo
Very helpful. Thank you, guys.
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Charles LiangCEOSuper Micro Computer, Inc.
Thank you.
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Q&A 5/7
OP
Operatoroperator
Your next question comes from Jon Lopez of Vertical Group.
JL
Jon LopezanalystVertical Group
Hi. Thanks very much. Can you hear me all right?
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David WeigandCFOSuper Micro Computer, Inc.
Yes, Jon. We can.
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Jon LopezanalystVertical Group
Great. Thanks, David. So I had a couple of quick ones. I wanted to start on the inventory side as well. So I apologize for doing that, but if I remember correctly, I think your purchase commitments or inventory purchase commitments as of June, excuse me, were up $550 million, $575 million something in that ballpark and add doubled versus where they were at the end of 2020 — calendar 2020? Can you give us a feel for where that stands now as of the end of September, and just given the size of this increases does that ultimately find its way onto your balance sheet? Or are you now it's sort of a steady state level where what's going out is more being matched with what's coming in?
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David WeigandCFOSuper Micro Computer, Inc.
Yes. So as I think the key is we're going into a seasonally strong December quarter.
And so we — that combined with the fact that we've got to make sure we get in ahead of supply chain delays as much as possible has really driven our decision to increase inventory levels up. So therefore in this — in the current market with the delays, both on the delivery side, as well as on the production side and the delays in containers making it to port, you've got to order earlier. So therefore we have to — we have to place orders in order to keep up with our customer demand. So that's really, and that's why we increased our credit lines and use those to increase inventory.
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Jon LopezanalystVertical Group
Okay. Got it. And just off the top of your head David, do you know where that number stood as of September?
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David WeigandCFOSuper Micro Computer, Inc.
I went out — we're don't, I don't. I don't release that number on the quarter.
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Jon LopezanalystVertical Group
Okay. All right. Great. Thanks for that. Secondly, I'm sorry, go ahead please.
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David WeigandCFOSuper Micro Computer, Inc.
So we'll have a little more color in the 10-K.
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Jon LopezanalystVertical Group
Sure. Of course. Your deferred revenue actually jumped up quite nicely. The current deferred was up like double digits, which hasn't really been the case for the last couple of quarters. Why was that?
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David WeigandCFOSuper Micro Computer, Inc.
So two reasons. Number one, we had some customers who prepaid and number two, we had some additional services that were — an increase in services that we had to defer.
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Jon LopezanalystVertical Group
Okay. That's help…
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Charles LiangCEOSuper Micro Computer, Inc.
That expand to, I just mentioned, we start to focus on our 5S business right, the software, breaches and service and those probably have a higher profitability, but they are also generally priority four revenue.
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Jon LopezanalystVertical Group
Got it. That's really helpful. Thanks. Sorry, two other quick ones. The first one is, David, I think you made mention to gross margin. I think you said it was going to increase. I wasn't sure if that meant in the December quarter or that was just sort of an intermediate term comment. But can you remind us a) like what are the targets again; and b) just put some color around that that comment and how we should think about maybe trending and trajectory?
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David WeigandCFOSuper Micro Computer, Inc.
Sure, absolutely. So our target model gross margin is of course 14 to 17. And we've mentioned that again, this quarter our transportation costs or freight costs went up by $3 million or 30 basis points. And that was on top of the increase from the prior quarter. Now, I can tell you that in my discussions with our operations people, it looks like that amount is starting to level off of that the rates are leveling off. And so we are — so the guidance that we give is giving or giving is to be up both in Q2, as well as in the second half.
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Jon LopezanalystVertical Group
Gotcha. Really helpful. Okay. And sort of is that leveling off a relatively recent phenomenon, or is that something maybe you observed through the course of the quarter?
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David WeigandCFOSuper Micro Computer, Inc.
That's just, I mean, there's only been one month in this quarter, but so far they don't seem to be increasing at the same rate that they were in prior quarters.
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Jon LopezanalystVertical Group
Gotcha. Okay. I'm sorry. I was trying to take the prior quarter. So they kept increasing through your fiscal Q1?
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David WeigandCFOSuper Micro Computer, Inc.
Yes. So in other words, through Q4, they continue to increase. And then in Q1, they also increased another 30 basis points. And another think about it is 30 basis points on lower evidence that the freight costs went up. So, I'm saying in the current Q2, we see that leveling off.
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Jon LopezanalystVertical Group
Gotcha. Really helpful. And so my very last one. Just as we think about your fiscal 2022 guidance, you mentioned that both units and prices increased in your September quarter. Excuse me, I'm wondering as we think about this sort of, let's call it 20% odd growth that you're building in for your fiscal 2022. Can you give us a rough sense for how much of that is going to come from pricing versus what's going to come from units?
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David WeigandCFOSuper Micro Computer, Inc.
I think that's too hard to judge. Yes.
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Jon LopezanalystVertical Group
Okay. Okay. Would your gut be that it's going to be a combination of the two? Maybe I can leave it there.
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David WeigandCFOSuper Micro Computer, Inc.
Absolutely. Absolutely.
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Jon LopezanalystVertical Group
Okay. All right. Great. Thank you very much.
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Q&A 6/7
OP
Operatoroperator
Your next question comes from Nehal Choski of Northland Capital Market.
NC
Nehal ChoskianalystNorthland Capital Markets
Yes. Thanks for taking my follow up questions. And great on the breakout relative to the three colors of growth that you're laid out here and I'll state really appreciate that. Do you have color on how each of these trended on a year-over-year basis relative to the overall year-over-year growth?
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David WeigandCFOSuper Micro Computer, Inc.
Yes, so we're actually on verticals. We didn't — we're not going back on a year-over-year basis, because we really started tracking this closely beginning with the fiscal year end. And so but as each quarter, now we'll give a little bit more insight. But I can tell you that, the one vertical that went down, which was in the 5G — I'm sorry, the OEM, and OEM appliance was really, as I mentioned, that was the digestion that I referred to from a couple of customers. And we see that returning that first returning in Q2.
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Nehal ChoskianalystNorthland Capital Markets
Got it. Okay, great. And then what is the risk that the strong demand that you're seeing is a result of the supply chain disruptions, and that you are having customers come through — new customers come to you in an effort to go or triple source, or of course, triple source and effectively alleviate their own supply chain issues?
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Charles LiangCEOSuper Micro Computer, Inc.
Yes, this is a very important area, we watch very well.
So most our orders are pretty evenly come from our customer base. So at this moment, I did not see in the specific this year. So pretty evenly come from many customer and from many different vertical.
And by the way, our Building Block Solutions, not advantages we can simply kind of the configurator system. So even in one customer slow down, we won't have to kind of really have a hard time for over inventory.
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Nehal ChoskianalystNorthland Capital Markets
Right. I think that later part is an excellent point. So maybe frame that up of the incremental demand that you're seeing. How much of that is coming in the form of a configuration that your competitors typically would not satisfy that they're much more limited configurations that they could provide.
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Charles LiangCEOSuper Micro Computer, Inc.
Yes. And see I'm very happy to share. Most of our growth from our Building Block Solutions, after we continue to emphasize our Building Block Solutions and see the most of the customer now put it our Building Block Solutions, because it's easy to support their urgent demand and also this over inventory risk for our sale and volume sale.
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Nehal ChoskianalystNorthland Capital Markets
Okay, great. And then my final follow-up question is for Dave. SG&A, I think, was down $4 million in Q2. Is that correct? And why is that?
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David WeigandCFOSuper Micro Computer, Inc.
So we had a little bit lower. We had — personal, it was — we had increased personnel costs. And then we did have a little bit lower bonuses this in Q2. I'm sorry, in Q1, I said in Q1.
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Nehal ChoskianalystNorthland Capital Markets
Alright, got it. Thank you very much.
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David WeigandCFOSuper Micro Computer, Inc.
Okay.
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Q&A 7/7
OP
Operatoroperator
Your next question comes from Jon Tanwanteng of CJS Securities.
JT
Jon TanwantenganalystCJS Securities
Hi everybody. Thank you for taking my question. Great quarter and outlook. David, I was just wondering if you could clarify the sequential increase in gross margins. What's getting that — where are you finding that? Is it mostly your selling prices catching up to inflation? Are you expecting to reduce some costs or realize some other efficiencies? Or is there a mix improvement as you go forward? Just help me understand what the sequential increase coming from?
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David WeigandCFOSuper Micro Computer, Inc.
Sure, Jon. There's a number of factors. Number one, we expect to start gaining traction from our auto-configurator, B2B, B2C solutions. We also have been exercising more price discipline.
And also, we've learned how to manage, how to better manage the passing on of freight charges and other things and our cost increases to our customers. So that, along with the — some of the margins from our new product offerings give us a good little bit better insight into margin growth.
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Jon TanwantenganalystCJS Securities
Okay. Perfect. And I just wanted to touch on the auto-configure and B2B. You mentioned actually. What was the sales advantage there? I don't know if you can quantify it exactly, but just give us a sense of how important that is to your growth and how big you expect it to be going forward in the next couple of quarters?
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Charles LiangCEOSuper Micro Computer, Inc.
It will be very important, especially for our long-term.
Before we see many come from manpower sales, FA and PA to work with customer one-by -one. But now we see inhabiting database, not online for CT, are able to help customers figure out what's the base configuration, what's the base of the product for them and then embed it through our commence center-based service. So almost all our customer in sales who have able use that system are very happy with the service and shrink the time to communicate and make the communication much more accurate product optimization, much more cost down and data performance. So for midterm, long-term, I'm very optimistic with auto-configurator command center-based B2B system.
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Jon TanwantenganalystCJS Securities
Great. Maybe just the last one for me. What is the margin of sales through that channel compared to your regular sales maybe versus what it normally has been?
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Charles LiangCEOSuper Micro Computer, Inc.
We did not share with that number yet. But basically, the profitability will be higher because B2B auto-configurator, we are able to work with many more customers and especially a lot of middle-sized enterprise customer now. But before we can take are only large-scale customer because we do not have in our man power to take care of 2 million ton. But now with automation we have, we are able to reach to many more middle-sized enterprise account. And for those accounts, as the pro-margin data.
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Jon TanwantenganalystCJS Securities
Okay, great. Thank you.
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Charles LiangCEOSuper Micro Computer, Inc.
Thank you.
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Closing Remarks
OP
Operatoroperator
[Operator Instructions] We will pause for just a moment to compile the Q&A roster. At this time, there are no further questions. Ladies and gentlemen, this concludes today's event. Thank you for your participation. You may now disconnect. One moment.
CL
Charles LiangCEOSuper Micro Computer, Inc.
Thank you so much to join us. And very happy to see you next quarter again. Thank you and a good day.
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