Super Micro Computer, Inc. Q3 FY2026 Earnings Call

Thank 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 Wiegand, chief financial officer, and Michael Stager, 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 Stager. Please go ahead.

Hey, good afternoon. Thank you for attending SuperMichael'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 Wiegand, 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 scripted commentary on our website. Please note that some of the information you'll hear during our discussion table consists 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 of fiscal year 2026 and the full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that can cause 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 10K 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's presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that provide investors with a means of evaluating and understanding how management evaluates the company's operating performance. These 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 to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation.

At the end of today's prepared remarks, we will have a Q&A session for Southside analysts. our fourth quarter fiscal 2026 period quiet period begins at the close of business friday june 12 2026 and for now i will turn the call over to charles thank you michael and thank you all for joining today's call we have 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 development regarding the entitlement of certain individuals formerly associated with the company i must be clear shibu micro is not a defendant no a target or a grand jury investigation and shibu maca had zero tolerance to any employee who violated the federal law and regulation. I am personally shocked and saddened by this logic actions, which in no way represented the value of this company. We took immediate action by terminating our relationship with the defendants and are helping and cooperating in fully with the u.s government additionally our independent directors have launched a solo independent investigation with top forensic and legal forms to ensure we continue to maintain the highest standard of integrity we are not waiting for these houses to finish we are further strengthen our global trade compliance program under expert leadership not only is it super Michael Flory commit to protecting advanced American technology and following the highest edge and business center but continue to extend our manufacturing footprint right here in United state again the allergic actions or a few individuals do not define us our focus remains on doing extraordinary work for our customer and partner and leading the industry with transparency and excellence now let's talk about a quarter this was a quarter defined by value and focus for shiver michael despite the industry-wide shortage of key components including cpu gpu and memory our business continues to grow and expand indeed our back order is now in another record high we advance and optimize the orders data center infrastructure using our leading direct liquid cooling dlc technology our focus remains on delivering the fastest time to online pto in the industry ensuring our customers can scale their ai factories quickly and most efficiently while our physical q3 revenue of 10.2 billion was impacted by customers' 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 the 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. We are committed to achieving a sustainable double digital gross margin model by increasing our focus on enterprise market and our DCPPS business. Here are some key growth drivers. First, market strength. Business remains very strong in the near cloud, solving AI, and authentic AI segment. We have been aggressively fostering the traditional enterprise and storage business for about one year and we start to see strong growth growing opportunities our data center building block solution dcbps continue to attract old and new customers interest and create new profitable streams by opening 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 commit to our total solutions, product mix, and efficiency. We improve our product mix with some more unique value products in this quarter and thereafter. we also advance our design of manufacturing the fm and more automation in our factories to build products faster with higher e-array and quality and supply chain we successfully managed inventory through a dynamic supply environment and took actions to reduce tariff related cost operation these efforts have improved flexibility protect margin and support customer delivery timeline here is the biggest story super micro is developing former us-based server designer and manufacturer into a total data center solution provider We expand our business to have a customer planning, building, deploy, and servicing data center infrastructure for global enterprise and new cloud provider especially. Our DCPBS business is essential to this transformation, providing almost everything a customer needs to build an AI factory, including cooling units, networking, power shell, battery backup, management software, and many other data center subsystems. Our DCPBS business continues to grow exactly as what we plan, showing a consistent and accelerating contribution to our top nine and bottom nine, quarter over quarter. and I believe our DCPPS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years, we have consistently turned industry disruption into innovation and new strong opportunities. One of the key values and drivers of our DCPPS business is our data center end-to-end management software we see significant demand for the super macro data center and cloud software suite including our super cloud composer then manage tens of thousands of systems or racks in real time it provides comprehensive control over system and right-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 of 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 books for this quarter. by 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 medicine we continue to grow and expand our partnership with many key suppliers especially with NVIDIA we are currently shipping many SKU or the latest right-scale systems including GP300 MVL 72 many b300 h gx skill b200 mvr4 and the influencing application optimized rtx product nice and we are preparing to be among the first to market with the new vera looping systems including an MVL-72 supercast. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD Helios solutions featuring APEC, Venus, and MI400 series of products. In addition, we are working closely with Intel and ARM on the development of upcoming Geon 6 Plus platforms and a new addition to our portfolio, including ARM AGI GPU-based solutions. This system will deliver exceptional performance per watt, specifically optimist for the growing demand of authentic AI workloads. By leveraging SuperMindCode system building block solution, right, and data center scale building block architecture, we can efficiently support a wide variety of compute platform 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 nestled are all ramping up aggressively Domestically, we recently announced our largest U.S. site to date, a new D.C. B.B.A.S. campus in Silicon Valley just one mile away from our headquarters. This brings our total Bay Area footprint to nearly 4 million square feet, featuring eight new buildings optimized for innovation design production and validation or our 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 tool subsystem and next generation networking solutions including advanced optical photonics based device with these expansions we are on track to produce more than 6,000 or the world's most powerful state-of-the-art drag for months. In closing, SuperMegos continue to scale our revenue and scale of value we have strengthened our governance delivering a meaningful margin recovery and expanded dcpbs growing in both volume and value through software networking service and more our leadership in dlc technology pair our ability to deliver right-scale total solution and the industry's fastest time to online will continue to fuel our strong growth, keeping supermarkets at the center of the 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.

Thank you, Charles. Fiscal Q3 FY26 revenue was $10.2 billion, up 123% year-over-year, and down 19% quarter-over-quarter. As Charles mentioned, the 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, one large data center customer at 27% of revenues, and one enterprise customer at 10% of revenues. By geography, the U.S. represented 69% of Q3 revenue, Asia 13%, Europe 7%, and rest of the world 11%. On a year-over-year basis, U.S. revenue increased 154%, Asia grew 1%, Europe grew 146%, and the rest of the world increased nearly 500%. On a quarter-over-quarter basis, U.S. revenue decreased 36 percent, Asia increased 17 percent, Europe increased 105 percent, and the rest of the world increased 392 percent. The Q3 non-GAAP gross margin was 10.1 percent, up from 6.4 percent 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 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 gap basis and 156 million on a non-gap basis resulting in a gap tax rate of 20.8 percent and a non-gap tax rate of 21.1 percent the q3 gap diluted earnings per share was 72 cents compared to guidance of at least 52 percent 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. Cash 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 dollars 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 credit facility and non-recourse ar sale facility we set up and convinced usage of a 1.8 billion dollar taiwan revolving credit facility to further support working capital requirements turning 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. GAAP 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. For 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.

Great. Before we begin Q&A, I'd like to remind everyone that the purpose of this call is to discuss our third quarter fiscal 26 financial results.

As such, we ask that you focus your questions on the results we announced today thank you in advance and Christo let's begin thank you if you would like to ask a question please press star one on your telephone keypad to raise your hand and join the queue and if you'd like to withdraw that question again press star one 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 Baruha with Loop Capital Michael, please go ahead.

Yeah, 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, you know, 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, and what those opportunities might be, that would be awesome. And then I have a quick follow-up. Thanks a lot.

Okay. 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 taking this matter seriously. The alleged conduct would violate our export control policies and procedures, and we're fully cooperating with the U.S. government to address this situation in addition our independent directors have retained an outside law firm munger tolls and olson and a frick a forensic firm alex partners 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. And lastly, on the 10Q, again, the independent investigation is 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 last comment about, you know, certainly 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.

Thanks for that context. And I guess my follow-up would be sort of dovetailing off of that. But you guys are probably aware, you know, sort of one of the top questions on investors' minds is in lieu of 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, Gen.AI 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.

Yeah, thank you for the question. Indeed, we are growing our customer base. Like last few quarters I shared, now we have many more Dutch customers and inner-sized customers. And from our experience, work with customers, communicate with customers, Most of the customers, indeed, feel pretty solid to continue our business and continue to grow together. So at this moment, I personally don't feel a negative feeling.

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

Your next question comes from the line of Samick Chatterjee with J.P. Morgan.

Please go ahead. hi thank you for taking my question this is mp on behalf of summit strategy for my first one i just wanted to ask in your last call you mentioned dcbbs contributions to profits during first half of about four percent 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 yeah yeah very good question yeah our tcpp is indeed a content to gain the 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 dcpbs continue to grow and we believe this growth will continue strongly in next two years, I personally expect at least 20% of our net income will be from DCPPS, including the management software.

Okay, 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 that it helped to add for the company thank you yeah 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 a new generation or 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 the 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 is big, but we continue to build more capacity.

Thank you.

Thank you.

Our next question comes from the line of Victor Q with Raymond James. Please go ahead.

Hi, guys. Thanks for taking the question. I just wanted to follow up on the first question that was asked. um does the investigation you know around the that may potentially impact um you know your relationship with nvidia uh you know subsequently you know your your allocation or supply of gpu and other components because i think that's uh another really frequent uh point of um concern that we get from from clients these days is uh you know how that impacts your relationship and you know whether or not that that's the dynamic there has changed at all our relationship with vendor have been a very long time right including invidia amd intel program so at this moment we feel our partnership stay strong and if not stronger at least as strong

as before and we continue to work together for lots of new projects so uh we also share with our vendor is uh some a few employees individuals case so uh i hope they are not impact basically david you want to add something you would like yeah i mean our understanding is that there's been no uh no change in um in allocation okay that's that's very helpful and just a quick um just a quick follow-up uh the investments that you previously noted uh that you made in engineering support and services have those mostly uh kind of peaked now and um you know is that contributing to the margin expansion at this point i'm sorry could you repeat that the investments that you've noted previously uh regarding engineering support services uh you know have those kind of uh peaked now at this point or uh you know i guess uh you know where are we uh you know along progress of those investments and you know how is that contributing to the margin dynamics going forward oh yeah i mean a very good question indeed our service uh business including uh data center planning designing or deploying or uh out of view of service continue to grow so we continue to grow that service team uh consulting team and revenue continue to grow yes in this segment of profit is much better than our uh average hardware for sure yeah but i would I would say it in no ways has peaked.

So, I mean, it's really, we're just gaining traction. Okay.

Thank you.

Your next question comes from the line of Asia Merchant with Citi. Please go ahead.

Well, 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 um basically were you constrained by supply 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 uh 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 yeah thank you yeah in

terms of shortage i believe it's a global uh common problem so uh in last uh six months as you know on 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 uh competitors other system company yes we suffer a lot from those shortage and those shortages may continue for uh we don't know how long like a 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 a customer base yes as why share last time we start to get more many more enterprise customer globally and So we add more large customers, and we add a lot of mid-sized and small-sized customers. And we will continue this direction to support more customers. Thank you.

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

Thank 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 sure so with the the tariffs you know as you know we're we're reduced by by the Supreme Court and there were some some replacement tariffs that came in so we are hopeful that tariffs will will be down net on a net basis, you know, going forward. So 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 uh in the uh in the march quarter so therefore we expect that to be incrementally up uh going forward uh as to the um you know the the supply constraints were you know as as charles mentioned were it was especially uh troublesome in the last six months um but we we we we expect some uh challenge going forward but not like we incurred over the last six months

That 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?

Yeah, so we think that 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 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 actually had more diversification this quarter, and we see that going 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.

Thank you. Your next question comes from the line of RootBlue Bhattacharya with Bank of America. Please go ahead.

Hi, thanks for taking my questions. I've got two. The first one is a clarification on revenues and gross margins. David, you mentioned that there was some push-out of revenue into future quarters. Can you help us quantify how much of that is coming back in in the December quarter versus 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.

Sure. So regarding the deferred revenue, it really comes down to, you know, when the customers are ready and when their data centers are ready, Ruplu. So, you know, we're always optimistic that we can ship right away, but that sometimes depends on customer readiness. So we have to wait and see, you know, how much lands in the June quarter and how much lands in the September quarter. As to margins, our margin mix is determined by, you know, which customers that we sell to and which products we sell. So that's really the biggest dynamic in affecting our margins. But 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 range.

But it will depend on which customers ultimately we sell to. got it thanks for the details sir 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 over on rack to a new kyber rack do you 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 on investments required as new gpus and new

rack designs come out thank you yeah very good question basically we are diversifying our customer base and also uh improving our uh total value uh now we have more and more uh 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 DCPPS total solution. So indeed our business will be more diversified and more kind of smooth slides 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.

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

Yeah.

So, Rupli, what I would say is I always hope that we need to go back to the markets for more money because that means- If we grow a lot. yeah but if we grow uh more stably uh our capital should be pretty enough so it depends it depends on how fast our growth rate is uh yeah we if we try to double again revenue then we may need some more help in total capital but if we grow a little bit humble then i believe we are pretty enough because now our business model is one is improving yeah your next question comes

from the line of Nihal Chokshi with Northland Capital Markets please go ahead hey thank you and congratulations on the strong gross margin um Charles you mentioned that over the next two years uh targeting 20 percent the data center building block solutions 20 was that gross profit or was that revenue?

Puffy.

Got it. Okay. Very good. And I can't remember, David or Charles, you gave a percentage for a dollar number of DCBBS in the quarter and a quarter ago period. Can you just repeat that again real quickly?

We didn't give that percentage out, Nahal, but our gross margin did increase on our data center uh sales uh but we i i don't have the uh the percentage of our gross profit that that represented yeah when the dcps percentage container grows we may uh quickly provide the the kind of percentage change okay um and so thinking about the significant improvement in gross margin would you look at that more towards DC

BBS ramp or more towards a reduction in your 10% customer going from 63% to 27% in that from the December or March quarter yeah I guess there are two factors will continue to improve our growth margins one is dcps solution with that segment our profit margin data most of the time at more than 20 percent and the other segment is the enterprise customer focus we start to grow minimal enterprise customer and we will continue that direction so that will improve our uh gross margin and net margin as well okay and then including the guidance is the expectation that this uh customer does 27 percent of revenue in the current quarter will continue to be a 10 plus percent customer yes we will have a many more uh neocloud uh kind of a middle-sized cloud customer and even small-sized cloud customers. And for sure, we will continue to support a large cloud customer as well. But small, near cloud, small cloud, enterprise cloud. So overall, our margin will continue to improve.

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

Hey, this is Neil Young. I'm for Quinn Bolton. Thank you 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 reflected in 2Q? And then I have a follow-up.

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

Okay, thanks, that's helpful. and then um just wanted to go back to gross margin one last time do you help us think about sort of what level is sustainable you know as we do look into fiscal year 27 as uh it seems like large ai deployments will most likely you know trend towards being a bigger mix of revenue in the coming quarters thanks yeah we believe we will continue our grow in a very healthy way because uh we are growing customer base.

We are growing a product line. We are growing a total solution, including software and service. So we are getting to a much mature, much high value partner to the market.

Your next question comes from the line of John Tenwanteng with CJS Securities. Please go ahead.

Hi, 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 of 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 help disclose that, that would be helpful as well.

Yeah, John, I think I'll go back to the comments that I made earlier that, you know, that, you know, we, the company was not named, you know, in this. And so, therefore, we, you know, we take these things very seriously. But we, and we're conducting our own internal investigations, you know, and I won't, I don't want to add any more to that.

And also, kind of based on what we know so far, though that could be a change as the investigation process, no one from the company other than the gross name in the DOJ in Diamond was involved so we we have a very good confidence with our integrity perfect thank you and then I have a follow-up if I could you mentioned record or 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 yeah basically we are faster growing company as you know so uh we can grow much faster if we accept the whole margin business so we try to be a balance in between the growth and the gross margin and net margin so basically we are in good shape i i would like to say we can uh control and decide uh the ratio of the balance.

Great, thank you for that.

Thank you.

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

Thanks for squeezing me in and congrats on the gross margin. On the gross margin and the mix, it sounds like the gross margin rebound is driven partly by some of these, what 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 to 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. uh indeed both uh kind of uh for ai uh enterprise i mean a lot of uh genetic ai uh kind of invention application so we see a very strong demand there and for traditional server and storage even iot we also start to uh gradually support and expand this market and we see a very good progress so we're continuing uh overall enterprise of business okay great and then on the on the revenue uh it sounds like um the reason for the slightly light revenue was this uh this 63

customer last quarter uh 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 is going to push out is that not going to be a bit of a drag down on the margins in the in the coming quarters um 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 and how that's changed over time yeah so we don't we don't give out our our backlog number um so the 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, neoclouds and cloud service providers, which we are expecting to increase both our footprint, our customer diversity, as well as our margins, along with our DCBBS and enterprise expansion.

Okay, thanks very much.

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