SMCI Earnings Call

KristaThank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Supermicro Computer Inc. Third Quarter 2026 Earnings Call. With us today are Charles Liang, Founder, President, and Chief Executive Officer; David Weigand, Chief Financial Officer; and Michael Staiger, Senior Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number 1 on your telephone keypad. And if you'd like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Michael Staiger. Please go ahead.

Michael StaigerGood afternoon. Thank you for attending Supermicro's call to discuss financial results for third quarter fiscal 2026, which ended March 31st, 2026. As you know, with me today are Charles Liang, founder, chairman, and chief executive officer, David Weigand, chief financial officer. By now you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the investor relations section of the company's website under the Events and Presentations tab. We've 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, future business outlook, including guidance for the fourth quarter fiscal year 2026 and the full fiscal year 2026.

Michael StaigerThese statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause the actual results or even events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier today, our most recent 10-K filing for fiscal '25, and other SEC filings. All these documents are available on the IR page of Supermicro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the company presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that it provides investors with a means of evaluating and understanding how management evaluates the company's operating performance.

Michael StaigerThese non-GAAP measures should not be considered in isolation from, as substitute for, or superior to financial measures prepared in accordance with U.S. GAAP. In addition, a reconciliation of GAAP and non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our fourth quarter fiscal 2026 quiet period Begins at the close of business Friday, June 12th, 2026. And for now, I will turn the call over to Charles.

Charles LiangThank you, Michael, and thank you all for joining today's call. We had significant business value growth with our technology leadership and market expansion. However, before I discuss the specific of the quarter, I want to provide an update on the recent developments regarding the indictment of certain individuals formerly associated with the company. I must be clear, Supermicro is not a defendant, nor a target of a grand jury investigation, and Supermicro has zero tolerance to any employee who violated federal law and regulation. I am personally shocked and saddened by these alleged actions, which in no way represent the value or ethics of this company. We took immediate action by terminating our relationship with the defendants and are helping and cooperating fully with the US government. Additionally, our independent directors have launched a thorough independent investigation with top forensic and legal firms to ensure we continue to maintain the highest standard of integrity.

Charles LiangWe are not waiting for these process to finish. We are further strengthening our global trade compliance program under expert leadership. Not only is Supermicro fully committed to protecting advanced American technology and following the highest ethical and business standards, but continue to expand our manufacturing footprint right here in United States. Again, the alleged actions of a few individuals do not define us. Our focus remains on doing extraordinary work for our customers and partners and leading the industry with transparency and excellence. Now let's talk about our quarter. This was a quarter defined by value and focus for Supermicro. Despite the industry-wide shortage of key components, including CPU, GPU, and memory, our business continues to grow and expand.

Charles LiangIndeed, our back order is now in another record high. We advanced and optimized our world's data center infrastructure using our leading direct liquid cooling, DLC, technology. Our focus remains on delivering the fastest time to online, TTO, in the industry, ensuring our customers can scale their AI factories quickly and most efficiently. While our fiscal Q3 revenue of $10.2 billion was impacted by, uh, customer site readiness delay, our business fundamentals are stronger than ever. This is purely a short-term delay. Several customers' sites were not yet equipped with the power and networking required for their cloud deployment, and we expect to capture this revenue in the coming quarters. One of our most significant achievements this quarter was our gross margin recovery, which increased significantly to 10.1% non-GAAP, representing a 58% improvement over the 6.4% non-GAAP reported in the previous quarter.

Charles LiangWe are committed to achieving a sustainable double-digit gross margin model by increasing our focus on enterprise market and our DCBBS business. Here are some key growth drivers. First, market strength. Business remains very strong in the neocloud, sovereign AI, and agentic AI segment. We have been aggressively fostering the traditional enterprise and storage business for about 1 year. And we start to see strong growth.

Charles LiangGrowing opportunities. Our data center building block solution, DCBBS, continues to attract old and new customers' interest and create new, uh, profit streams by offering a total data center solution that includes complete liquid cooling, facility, management software, networking, and service. We are providing much more value to our customers as they committed to our total solutions.

Charles LiangProduct mix and efficiency. We improve our product mix with some more unique value product in this quarter and thereafter. We also advance our design of manufacturing, DFM, and more automation in our factories to build products faster with higher yield rate and quality. And supply chain. We successfully manage inventories through a dynamic supply environment and took actions to reduce tariff related cost inflation. These efforts help improve flexibility, protect margin, and support customer delivery timeline.

Charles LiangHere is the bigger story. Supermicro is evolving from a US-based server designer and manufacturer into a total data center solution provider. We expand our business to help customer planning, building, deploying, and servicing data center infrastructure for global enterprise and neocloud provider especially. Our DCBBS business is essential to this transformation, providing almost everything a customer needs to build an AI factory, including cooling units, networking, power shelf, battery backup, management software, and many other data center subsystems.

Charles LiangOur DCBBS business continues to grow exactly as what we planned, showing a consistent and accelerating contribution to our top line and bottom line quarter over quarter. And I believe our DCBBS will soon contribute more than 25% of our total profit in the coming few years.

Charles LiangAs an IT technology leader for more than 30 years, we have consistently turn industry disruption into innovation and new strong opportunities. One of the key value and drivers of our DCBBS business is our data center end-to-end management software. We see significant demand for the Supermicro data center and cloud software suite, including our SuperCloud Composer. That manage tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage, cooling status, safety condition, and device utilization alongside many other critical features. Our Management software feature also include advanced CPU and GPU workload orchestration, which is a critical function for today's AI data center. The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarters ago to $34 million last quarter and more than $46 million booked for this quarter.

Charles LiangBy bundling subscription-based software and service alongside our hardware, we are strengthening our customer relationship and improving our long-term profitability. We expect DCBBS, including software and service, to continue its rapid growth and to become a major part of our key value very soon. We continue to grow and expand our partnership with many key suppliers, especially with NVIDIA. We are currently shipping many SKUs of the latest rack-scale systems including GB300 NVL72, many B300 HGX SKU, B200 NVL4, and the inferencing application optimized RTX product lines. And we are preparing to be among the first to market with the new VERA Rubin systems. Including the NVL72 super cluster. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD Helios solutions featuring EPYC, VENICE, and MI400 series. Our products. In addition, we are working closely with Intel and ARM on the development of upcoming Xeon 6+ platforms and a new addition to our portfolio, including ARM AGI GPU-based solutions.

Charles LiangThese systems will deliver exceptional performance per watt.

Charles LiangSpecifically optimized for our growing demand of agentic AI workloads. By leveraging Supermicro's system Building Block Solution rack and data center scale building block architecture, we can efficiently support a wide variety of compute platforms and optimize them for different business verticals. Moving on to our footprint. We are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia, and Netherlands are all ramping up aggressively.

Charles LiangDomestically, we recently announced our largest US site to date, a new DCBBS campus in Silicon Valley, just 1 mile away from our headquarters.

Charles LiangThis brings our total Bay Area footprint to nearly 4 million square feet, featuring 8 new buildings optimized for innovation, design, production, and validation over next-generation end-to-end data center total solutions. Within this new campus, we are building multiple large-scale validation and production facilities. Some of them including a clean room specifically to support our new DLC-2 subsystem. And next-generation networking solutions, including advanced optical photonics-based devices.

Charles LiangWith these expansions, we are on track to produce more than 6,000 of the world's most powerful state-of-the-art racks per month.

Charles LiangIn closing, Supermicro continues to scale out revenue and scale up value. We have strengthened our governance, delivering a meaningful margin recovery, and expanded DCBBS, growing in both volume and value through software, networking, service, and more. Our leadership in DLC technology pair our ability to deliver large-scale total solution and industry's fastest time to online will continue to fuel our strong growth, keeping Supermicro at the center of our AI revolution. With that, I remain very bullish about our growth in the AI and data center market. For the first quarter, we target $12 billion given stable supply conditions. For the full year, we target $40 billion. I will turn this over to David.

David WeigandThank you, Charles. Fiscal Q3 FY26 revenue was $10.2 billion, up 123% year over year and down 19% quarter over quarter. As Charles mentioned, Q3 revenue was impacted by data center and customer readiness together with industry-wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remain strong across our customer base, driven by AI infrastructure demand, with AI GPU-related platforms contributing over 80% of revenue. During Q3, the enterprise channel revenue totaled $2.8 billion, representing about 28% of revenue versus 15% in the prior quarter. This was up 46% year over year and up 45% quarter over quarter. The OEM appliance and large data center segment revenue was $7.4 billion, representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year over year and down 31% quarter over quarter. For Q3 FY26, we had two existing customers, each representing more than 10% of revenues.

David WeigandOne large data, data center customer at 27% of revenues and one enterprise customer at 10% of revenues. By geography, the US represented 69% of Q3 revenue, Asia 13%, Europe 7%, and rest of world 11%. On a year-over-year basis, US revenue increased 154%, Asia grew 1%, Europe grew 146%, and the rest of world increased nearly 500%. On a quarter-over-quarter basis, US revenue decreased 36%, Asia increased 17%, Europe increased 105%, and the rest of the world increased 392%.

David WeigandThe Q3 non-GAAP gross margin was 10.1%, up from 6.4% in Q2. Gross margins were ahead of expectations, driven by our customer and product mix together with lower tariffs expedite and inventory reserve charges. Q3 GAAP operating expenses were $393 million, which was up 34% year over year and up 21% quarter over quarter. On a non-GAAP basis, operating expenses were $278 million, up 29% year over year and up 16% quarter over quarter. Both GAAP and non-GAAP operating expenses were up quarter over quarter due to higher headcount-related expenses. Non-GAAP operating margin was— for Q3 was 7.3% compared to 4.5% in Q2. Other income and expense for Q3 totaled a net expense of $15 million, reflecting $49 million in interest and other income offset by $64 million in interest expense related to convertible notes and the revolving credit facilities. The tax provision for Q3 was $127 million on a GAAP basis and $156 million on a non-GAAP basis, resulting in a GAAP tax rate of 20.8% and a non-GAAP tax rate of 21.1%.

David WeigandThe Q3 GAAP diluted earnings per share was $0.72 compared to guidance of at least 52 cents, and non-GAAP diluted EPS was 84 cents versus guidance of at least 60 cents due to higher gross margins. The GAAP fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3, while the non-GAAP share count was largely flat at 709 million in Q3 compared to Q2.

David WeigandCash flow used in operations for Q3 was $6.6 billion compared to $24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of $581 million. These factors were only partially offset by higher net income, and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was $11.1 billion, up from $10.6 billion in Q2. CapEx for Q3 totaled $80 million, resulting in negative free cash flow of $6.7 billion for the quarter. At quarter end, our cash position totaled $1.3 billion. Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible note debt was $8.8 billion, resulting in a net debt position of $7.5 billion compared to a net debt position of $787 million in the prior quarter. In addition to using our existing U.S. Revolving credit facility and non-recourse AR sale facility, we set up and commenced usage of a $1.8 billion Taiwan revolving credit facility to further support working capital requirements.

David WeigandTurning to the balance sheet and working capital metrics, the cash conversion cycle increased from 54 days in Q2 to 106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter. Days sales outstanding increased by 36 days to 85 days versus 49 days in Q2, while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2. Now turning to the outlook for Q4. Fiscal year '26, which ends June 30th, 2026, we expect net sales in the range of $11 billion to $12.5 billion. We expect GAAP diluted net income per share of $0.53 to $0.67 and non-GAAP diluted net income per share of $0.65 to $0.79. We expect gross margins to be in the range of 8.2% to 8.4% based on expected customer mix.

David WeigandGAAP operating expenses are expected to be around $433 million, which include approximately $114 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q4 of fiscal year 2026 fully diluted GAAP earnings per share includes approximately $95 million in expected stock-based compensation expenses net of tax effects of $30 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to result in a net expense of approximately $36 million. The company's projections for Q4 fiscal year '26 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.4%, and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non-GAAP. Capital expenditures for Q4 are expected to be in the range of $30 to $50 million.

David WeigandFor the full fiscal year 2026, we expect net sales to be in the range of $38.9 billion to $40.4 billion. Michael, we're now ready for Q&A.

Michael StaigerGreat. Hey, before we begin Q&A, I just like to remind everyone that the purpose of this call is to discuss our third quarter fiscal 2026 financial results. As such, we ask that you focus your questions on the results we announced today. Thank you in advance, and, uh, Krista, let's begin.

KristaThank you. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. We kindly ask that you limit yourself to one question and one follow-up. For any additional questions, please requeue. And your first question comes from Ananda Baruah with Loop Capital. Please go ahead.

Ananda BaruahYeah, guys, thanks for taking the question and congrats on the progress with the gross margin. It's great to see that. Yeah, a couple if I could. I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout sort of during the quarter. I guess specifically, could you give us an update on the indictment? Any more insight to any company employee involvement? Do you think you'll have to restate earnings? Are you on track to file your 10-Q? Things like that. And then I guess part and parcel with that, on the board investigation that you guys announced, if you could talk to the opportunity that that could have to strengthen the organization, you know, sort of, and what those opportunities might be, that would be awesome. And then I have a quick follow-up. Thanks a lot.

David WeigandOkay. Thanks, Ananda. So the company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced, we're, we're taking this matter seriously. Uh, the alleged conduct would violate our export control policies and procedures, and we're fully cooperating with, uh, the US government to address this situation. In addition, our independent directors have retained an outside law firm, Munger, Tolles & Olson, and a, a forensic firm, AlixPartners, to conduct an independent investigation into these events. The investigations are ongoing and we can't give you any final information at this time. So based on what we know so far, though that could change as the investigation progresses, no one from the company other than those named in the DOJ indictment was involved. As to your second question on restatement of earnings, based on everything we know at this moment and considering the independent investigation is ongoing, we do not believe we will need to restate.

David WeigandAnd, uh, lastly, on, on the, on the 10-Q, uh, uh, again, the independent investigation's ongoing and any filing will be subject to BDO review. But based on what we know at this moment, we are planning to file our 10-Q and are preparing accordingly. And I think your, your last comment about, uh, you know, uh, certainly, uh, we will be taking to heart the results of the independent investigation, and we will look at that as an opportunity to grow and strengthen.

Ananda BaruahThanks for that context. And I guess my follow-up would be sort of dovetailing off of that. You guys are probably aware, you know, sort of one of the top questions on investors' minds is in lieu of in lieu of these, these sort of aforementioned dynamics, you know, is there potential for customers to get, you know, a little skittish and move away to other server vendors, you know, GenAI server vendors? So to the degree that you have any context that you could offer there, that would be greatly appreciated. And that's it for me. Thanks.

Charles LiangYeah, thank you for the question. Indeed, we are growing our customer base like last few quarters I share. Now we have many more large customers and middle-sized customers. And from our experience, work with customers, communicate with customers, most of customers indeed feel pretty solid to continue our business and continue to grow together. So at this moment, I personally don't feel any negative feeling.

Ananda BaruahGot it. Thanks. Thank you for the context. I really appreciate all that. Thanks.

KristaYour next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

MPHi. Thank you for taking my question. This is MP on behalf of Samik Chatterjee. For my first one, I just wanted to ask, In your last call, you mentioned DCBBS contributions to profits during first half of about 4%. Can you please update how did it track during the quarter and how much of a driver was that relative to gross margin improvement that you saw during the quarter? And I have a follow-up.

Charles LiangYeah, yeah, very good question. Yeah, our DCBBS indeed continue to gain more and more attraction from our old customer and new customer, so it's a very good value add. To our hardware and also enhancing our relationship with the customer. So the customer who use our DCBBS continue to grow and we believe this growth will continue strongly. In next 2 years, I personally expect at least 20% of our net income will be from DCBBS. Including the management software.

MPOkay, thank you. And then for my follow-up, I just wanted to ask on capacity additions which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company? Thank you.

Charles LiangYeah, also very good question. Again, our capacity now is very huge, but we continue to grow our capacity because we like to make sure ourselves ready for for new generation of data center need for our industry. For example, a much higher density in power, in computing density, and also in photonics technology and newer generation of switch. So we are preparing all of that. And some of the new facility indeed was paired with clean room. So to make sure we are able to provide exactly the best liquid cooling, the best communication bandwidth, and minimize the power consumption for the new generation data center need. So although our capacity already big, but we continue to build more capacity.

MPThank you.

Charles LiangThank you.

KristaYour next question comes from the line of Victor Tu with Raymond James. Please go ahead.

Victor TuHi guys. Thanks for taking the question. I just wanted to follow up on the first question that was asked. Does the investigation around the indictment potentially impact your relationship with NVIDIA, subsequently your allocation or supply of GPU and other components? Because I think that's another really frequent point of concern that we get from clients these days is how that impacts your relationship and whether or not that that's the dynamic there has changed at all.

Charles LiangOur relationship with vendor have been very long time, right? Including NVIDIA, AMD, Intel, Broadcom. So at this moment, we feel our partnership stay strong and even stronger, at least as strong as before. And we continue to work together for lots of new projects. So we also share with our vendor is some, a few employees' individual case. So I hope there are no impact basically. David, you want to add something?

David WeigandYeah, I mean, our understanding is that there's been no change in allocation.

Victor TuGreat. That's very helpful. And just a quick follow-up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now? And is that contributing to the margin expansion at this point?

David WeigandI'm sorry, could you repeat that?

Victor TuPete, the investments that you've noted previously regarding engineering support services, Have those kind of peaked now at this point? Or I guess where are we along progress of those investments and how has that contributed to the margin dynamics going forward?

Charles LiangOh yeah, I mean, a very good question. Indeed, our service business, including data center planning, designing, or deploying, or other BWAP services, continue to grow. So we continue to grow that service team, consulting team, and revenue continue to grow. Yes, in this segment, the profit is much better than our average hardware, for sure.

David WeigandYeah, but I would say it in no ways has peaked, though. I mean, it's really—. We're just gaining traction.

Victor TuOkay, I got it. Thank you.

KristaYour next question comes from the line of Asiya Merchant with Citi. Please go ahead.

Asiya MerchantOh, great. Thanks for taking my question here. If I could, on just the supply constraints, there's been a lot of talk about, you know, CPU-based shortages. So just the guide that you're providing, are you constrained in any components here? And would there be a number, you know, if these supply issues were resolved? Basically, were you constrained by supply? AI. And then if I can squeeze in one more as well on the data center, clearly you're seeing traction here, you know, relative to where you were last quarter when it was just starting to kick through. Can you help us understand what kind of customers, if you're seeing any change in the customers, you know, whether it's from a vertical perspective or a geography perspective, where you're seeing traction with these data center building block solutions? Thank you.

Charles LiangYeah, thank you. Yeah, in terms of shortage, I believe it's a global common problem. So in last 6 months, as you know, on the memory, SSD price grow so much, double, triple, more than triple, and some CPU shortage, especially from Intel. So, and also even some GPU shortage, right? So we, like other competitors, other system companies, yes, we suffer a lot from those shortages. And those shortages may continue for we don't know how long, like memory and SSD. But we have a very good relationship with our vendor. So we continue to work with them and try to again more long-term support. As to our customer base, yes, as what I share last time, we start to get more, many more enterprise customers globally and NeoCloud. So we add more large customers and we add lots of mid-size and small-size customers, and we will continue this direction.

Charles LiangTo support more customers.

Asiya MerchantGreat, thank you.

Charles LiangThank you.

KristaYour next question comes from the line of Catherine Murphy with Goldman Sachs. Please go ahead.

Catherine MurphyThank you for the question. I was wondering if there was any one-time items that impacted gross margins in the quarter and anything you could share there specifically to quantify. I think you mentioned tariffs, expedite fees, and then inventory reserve charges? That would be helpful. And then I have a quick follow-up. Thank you.

David WeigandSure. So with the tariffs, you know, as you know, were reduced by the Supreme Court, and there were some replacement tariffs that came in. So we are hopeful that tariffs will be down net, on a net basis, you know, going forward. So whether I can, whether either, whether I look at that as a temporary or ongoing thing is based on optimism. But the other thing regarding expedite fees, we had a very large deployment in our March quarter, which, I'm sorry, in our December quarter, which ended up incurring a lot of expedite charges. So we did, those did not recur in the March quarter. So therefore, we expect that to be incrementally up going forward. As to the, you know, the supply constraints, you know, as Charles mentioned, were— it was especially troublesome in the last 6 months, but we expect some challenge going forward, but not like we incurred over the last 6 months.

Catherine MurphyThat was very helpful. And then in terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness, and that deal was contemplated in your prior guidance for a margin benefit that was modest quarter over quarter. Was that deal that flipped or was otherwise delayed a drag on consolidated gross margins? And how should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here?

Catherine MurphyYes.

David WeigandSo we think that some of the—. Some of the large deals that we talked about in the past have been incrementally beneficial to Supermicro because of our reputation, the reputation that it brings for us in deploying large-scale installations to some of the best sites in the world. And so what we notice now is that we're, as Charles mentioned, we're not only getting more larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales. And so we're actually— we actually had more diversification this quarter, and we see that going into the current, you know, into the June quarter as well. So we think on a net basis, some of the strategic decisions that we made on large installations have been beneficial.

Catherine MurphyThank you.

KristaYour next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.

Ruplu BhattacharyaHi, thanks for taking my questions. I've got two. The first one is a clarification on revenues and gross margins. Uh, David, uh, you, you mentioned that there was some pushout of revenue into future quarters. Can you help us quantify how much of that is coming back in the December quarter versus how how much will be in future quarters? And on the margin side, can you help us clarify how you're thinking about the margin decline from fiscal 3Q to fiscal 4Q? I think you guided 8.3% gross margin on higher $11.8 billion of revenue. So what are some of the factors impacting gross margins between fiscal 3Q and 4Q? And I have a follow-up.

David WeigandSure. So regarding the deferred revenue, It really comes down to when the customers are ready and when their data centers are ready, Ruplu. So we're always optimistic that we can ship right away, but that sometimes depends on the customer readiness. So we have to wait and see how much lands in the June quarter and how much lands in the September quarter. As to margins, the, uh, our margin mix is determined by, you know, which customers that we sell to and which products we sell. So that, that's really the biggest dynamic in, uh, in affecting our, our margins. But, uh, what we, you know, so therefore what we see is a good upward trend, you know, to that, you know, 8.2 to 8.4, uh, range. Um, and, uh, but it will depend on which customers ultimately we we sell to.

Ruplu BhattacharyaGot it. Thanks for the details there. Can I ask a follow-up on working capital? In the past when we've had GPU transitions, you've had to spend some working capital and time and money as customers qualify these new racks. So I'm thinking as NVIDIA releases new GPUs and when the transition happens from the Oberon rack to a new Kyber rack, how are you thinking about your working capital needs? And is there a chance that you might have to come to the capital markets again to raise capital for working capital. So just your thoughts on investments required as new GPUs and new rack designs come out. Thank you.

Charles LiangYeah, very good question. Basically, we are diversifying our customer base and also improving our total value. Now we have more and more partnership that we not just build the AI server, not just the storage, but we have customer deployment and build a whole data center with DCBBS total solution. So indeed, our business will be more diversified and more kind of smooth slide in terms of revenue dynamic and also profit margin change. So in terms of those concerns, we are improving in a very positive direction now, quarter after quarter, basically.

Ruplu BhattacharyaOkay. And in terms of working capital, David, any thoughts there?

David WeigandYeah. So, Ruplu, what I would say is I always hope that we need to go back to the markets for more money because that means we grow a lot.

Charles LiangYeah, yeah. But if we grow more stably, our capital should be pretty enough. So it depends.

David WeigandIt depends on how fast our growth rate is.

Charles LiangYeah, we, we try to double again revenue, then we may need some more help in terms of capital. But if we grow a little bit humble, then I believe we are pretty enough because now our business model is improving.

Ruplu BhattacharyaYeah.

KristaYour next question comes from the line of Nehal Chokshi with Northland Capital Markets. Please go ahead.

Nehal ChokshiHey, thank you, and congratulations on the strong gross margin.

Nehal ChokshiCharles, you mentioned that over the next 2 years targeting 20% to data center building block solutions, 20%. Was that gross profit or was that revenue?

Charles LiangUh, profit.

Nehal ChokshiGot it.

Charles LiangOkay, very good.

Nehal ChokshiAnd, um, I can't remember, David or Charles, you gave a percentage or a dollar number of DCBBS in the quarter and a quarter ago period. Could you just repeat that again real quickly?

David WeigandWe didn't, uh, we didn't give that percentage out, uh, Nehal. But our gross margin did increase on our data center sales. But I don't have the percentage of our gross profit that that represented.

Charles LiangYeah, when the DCBBS percentage continue to grow, we may quickly provide the kind of percentage change.

Nehal ChokshiOkay. And so Thinking about the significant improvement in gross margin, um, would you bucket that more towards DCBBS ramp or more towards a reduction in your, uh, 10% customer going from, uh, 63% to 27% in that— from the December to March quarter?

Charles LiangYeah, I guess there are two factors. We'll continue to improve our gross margins. One is the DCBBS solution. With that segment, our profit margin did most of the time at more than 20%. And the other segment is enterprise customer focus. We start to grow many more enterprise customers and we will continue that direction. So that will improve our gross margin and net margin as well.

Nehal ChokshiOkay. And then included in the guidance is the expectation that this customer that is 27% of revenue in the current quarter will continue to be a 10+ percent customer?

Charles LiangYes, we will have many more neocloud, kind of a middle-sized cloud customer. And even small size cloud customer. And for sure, we will continue support a large cloud customer as well, but more neocloud, small cloud, enterprise cloud. So overall, our margin will continue to improve.

KristaYour next question comes from the line of Quinn Bolton with Needham Company. Please go ahead.

Neil YoungHey, this is Neil Young on for Quinn Bolton. Thanks for letting me ask a question. So I was hoping you could touch on maybe what drove— you did a little bit, but maybe touch on what drove the strong quarter-over-quarter increase in Enterprise. And then, you know, are you expecting to see healthy growth from Enterprise again here in the next quarter and through fiscal year '27? Or, you know, should we think about the revenue split by channel more closely reflecting 2Q? And then I have a follow-up. Thank you.

Charles LiangYeah, we don't provide a detail, but the direction is there very strongly. I mean, improve many more enterprise customer, and we see lots of customer really like to work with us. And then at the same time, the DCBBS help us to engage with more and more neocloud and enterprise AI data center customers. So long term, we feel pretty comfortable in this direction.

Neil YoungOkay, thanks. That's helpful. And then just wanted to go back to gross margin one last time. Can you help us think about sort of what level is sustainable? You know, as we do look into fiscal year '27, as it seems like large AI deployments will most likely trend towards being a bigger mix of revenue in the coming quarters.

Neil YoungThanks.

Charles LiangYeah, we believe we will continue to grow in a very healthy way because we are growing customer base, we are growing product line, we are growing total solution including software and service. So we are getting to a much more mature, much higher value partner to the market.

KristaYour next question comes from the line of Jonathan Tanwanteng with CJS Securities. Please go ahead.

Jonathan TanwantengHi, thank you for taking my questions and really nice quarter. I was wondering if you could just address a little bit more on the export violation issue and if that might impact your ability to finance growth or the cost to finance growth going forward. And I don't know if you talked about the cost of remediation or addressing the violations, preventing them. From happening again. But if you could, um, help disclose that, that would be helpful as well.

David WeigandYeah, Jonathan, I think I'll go back to the, you know, the comments that I made, uh, earlier that, you know, that, uh, you know, we, uh, the company was not named in, in this. And so therefore, we, uh, you know, we take these things very seriously, uh, but, uh, we, um,, and we're conducting our own internal investigation, as you know, and I won't, I don't want to add any more to that.

Charles LiangAnd also, uh, uh, kind of, uh, based on, uh, what we know so far, uh, though, uh, that could be a change as the investigation process, no one from the company other than those named in the DOJ indictment, uh, was involved. So we, we have a very good confidence with our integrity.

Jonathan TanwantengPerfect. Thank you. And then I have a follow-up if I could. You mentioned record backlog and strong orders, and I was wondering what that indicates heading into the back half of this calendar year, just from a growth perspective, number one. And number two, if the supply environment can support growth over the first half.

Charles LiangYeah, basically we are a fast-growing company, as you know, so we can grow much faster if we accept the low margin business. So we try to be balanced in between the gross and the gross margin and net margin. So basically we are in good shape. I would like to say we can control and decide the ratio of the balance.

Jonathan TanwantengGreat. Thank you for that.

Charles LiangThank you.

KristaYour final question comes from the line of Mark Newman with Bernstein. Please go ahead.

Mark NewmanThanks for squeezing me in, and congrats on the gross margin. On the gross margin and the mix, it sounds like that's— the gross margin rebound is driven partly by some of these, what do you call it, expedition charges reducing. But also, it sounds like, if I get it right, the enterprise mix is also helping. I wanted to ask, just clarify if that's right. And within enterprise, is that AI server or is this more traditional server? I have another question also on the revenue as well. Thanks.

Charles LiangIndeed, both. Kind of for AI enterprise, I mean, a lot of agentic AI kind of information application. So we see a very strong demand there. And for traditional server and storage, even IoT, we also start to gradually support and expand this market, and we see a very good progress. So we will continue over enterprise business.

Mark NewmanOkay, great. And then on the, on the revenue It sounds like the reason for the slightly light revenue was this 63% customer last quarter now pushed out a little bit, which is, I believe, the 27% customer. As that customer comes back, presumably, if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the coming quarters? And also, just one more quick question. You mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time.

David WeigandYes, so we don't give out our backlog number. So we just make general comments about the fact that it's very strong. But we are, as I mentioned earlier, we've diversified our pipeline extensively. And so we have, as Charles mentioned, we have a number of large deals from new, you know, neo clouds and cloud service providers, which we are expecting to increase both our, you know, our footprint our customer diversity, as well as our margins, along with our DCBBS and enterprise expansion.

Mark NewmanOkay, thanks very much.

KristaThank you. Ladies and gentlemen, that does conclude today's conference call. Thank you all for your participation, and you may now disconnect.