Earnings Call Transcript - SMCI Q2 2024

Operator, Operator

Thank you for standing by. My name is Cole and I'll be your conference operator today. At this time, I would like to welcome everyone to Super Micro Computer Fiscal Second Quarter 2024 Results. With us today are Charles Liang, Founder, President, and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, 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. And with that, I'd like to pass the call over to Michael Staiger.

Michael Staiger, VP of Corporate Development

Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the second quarter, which ended December 31, 2023. With me today are Charles Liang, Founder, Chairman, and Chief Executive Officer; and David Weigand, Chief Financial Officer. 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 Investor Relations 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 will 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 third quarter of fiscal year 2024 and the full fiscal year 2024. 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 2023, 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 the press release published earlier today. 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 sell-side analysts to ask questions. I will now turn the call over to Charles.

Charles Liang, CEO

Thank you, Michael, and good afternoon everyone. I'm pleased to share our second quarter results, which reflect a record performance for Super Micro. We generated revenue of $3.66 billion, representing a 133% increase compared to last year, and our earnings per share reached $5.59. This marks our first quarter with revenue exceeding $3 billion, surpassing our entire annual revenue for 2021. This remarkable performance was fueled by strong demand and improving supply conditions for GPU and key system components. Our rack-scale plug-and-play IT and AI Total Solution is attracting more new customers who trust Super Micro as their preferred infrastructure partner. Our AI rack-scale solutions, especially the Deep-Learning and LLM-optimized offerings based on NVIDIA HGX-H100, are becoming increasingly popular. There is also a growing demand for AI inferencing systems and mainstream compute solutions. Excitingly, we are entering a phase of accelerating demand driven by numerous new customer wins. To support this growth, we have enhanced our working capital by raising approximately $600 million through an equity offering. Additionally, we have plans to boost our cash flow without additional equity dilution to sustain both short-term and long-term growth. Overall, I am very optimistic that this AI boom will continue for many quarters, if not years. With the accompanying inferencing and computing ecosystem requirements, we anticipate sustained demand for decades, which we could term an AI revolution. Now, let's review some key financial highlights. First, our fiscal Q2 net revenue was $3.66 billion, up 103% year-on-year and up 73% quarter-on-quarter, exceeding our original guidance of $2.9 billion for the December quarter. Second, our fiscal Q2 non-GAAP earnings of $5.59 per share significantly surpassed last year's $3.26 and exceeded our guidance range of $4.40 to $4.88, highlighting our strong operating leverage. Achieving economies of scale is crucial for our continued growth. Supermicro is at the forefront of the AI revolution, where the rate of innovation is accelerating. We are leading this charge by developing the most innovative AI infrastructure across multiple platforms at rack scale, catering to a range of industries and market verticals. As the market leader, we are preparing to double our AI portfolio size with upcoming NVIDIA CG1, CG2 Grace Hopper Superchip, H200, and B100 CPUs, among other new platforms expected to be ready for high-volume production in the coming months. Furthermore, we are enhancing our architectures for NVIDIA's forthcoming GPU product lines. Our AMD MI300X systems are in the sampling stage, and our Intel Gaudi 3 system is on its way. We are also committed to investing in and innovating datacenter and enterprise liquid cooling technology, ensuring these high-power AI platforms align with our green computing goals while enhancing performance, efficiency, and reliability. As a Total IT Solutions innovator, manufacturer, and provider, we are increasingly delivering major deployments as integrated rack solutions, particularly for AI cluster projects. Servers, networking, storage, security features, and software are optimized, validated, and serviced as an integrated rack cluster from our global manufacturing facilities. Utilizing our building-block architecture and advanced production automation, we can offer optimized rack solutions with time-to-market and quality benefits more efficiently than our competitors. Our Time-to-Delivery is consistently improving. By this June quarter, we will have dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid cooling capabilities, allowing us to produce up to 1,500 racks per month, and our total production capacity may reach up to 5,000 racks monthly. Simultaneously, our high-volume clean room facility will be ready to assist critical customers shortly. The rapid expansion of our business necessitates increased R&D, solution optimization, manufacturing, and service capacity. Currently, our production utilization rate stands at around 65% across our USA, Netherlands, and Taiwan facilities, which are quickly approaching full capacity. To mitigate this immediate capacity issue, we are establishing two new production facilities near our Silicon Valley headquarters, expected to be operational in a few months. One facility in Malaysia will focus on expanding our building blocks with cost efficiencies and higher volumes, while the other will support our annual revenue capacity beyond $25 billion. To summarize, our record quarterly performance reflects our leadership in the Building Block rack scale plug-and-play IT and AI space, which continues to grow and indicates strong market share gains. The solid performance from existing customers and the increase in new customers, combined with a robust pipeline of new products set for 2024, gives me confidence that fiscal Q3 revenue will range from $3.7 billion to $4.1 billion. We also anticipate ongoing strength in the second half of fiscal 2024, projecting full fiscal year revenue to be between $14.3 billion and $14.7 billion. We are operating at full throttle to accelerate Supermicro 3.0 amidst this AI boom, while also preparing for the next phase of growth with Supermicro 4.0 and its expanding Total Addressable Market. This is indeed a thrilling time for Supermicro. Now, I will hand the call over to David Weigand, our Chief Financial Officer, for further financial insights.

David Weigand, CFO

Thank you, Charles. Fiscal Q2 2024 revenues were $3.66 billion, up 103% year-over-year and up 73% quarter-over-quarter. Revenues were higher than our initial guidance of $2.7 billion to $2.9 billion and slightly above our recently updated guidance of $3.6 billion to $3.65 billion. Our growth was driven by demand from new and existing customers for our leading AI and rack-scale Total IT solutions and an improving supply chain. Next generation AI and CPU platforms continue to drive strong levels of design wins, orders, and backlog from top-tier data centers, emerging cloud service providers, enterprise/channel, and edge/IoT/telco customers. During Q2, we recorded $1.48 billion in the enterprise/channel vertical, representing 40% of revenues versus 43% last quarter, up 55% year-over-year and up 62% quarter-over-quarter, driven by enterprise AI and CPU upgrade programs. The OEM appliance and large data center vertical revenues were $2.15 billion, representing 59% of Q1 revenues versus 55% last quarter, up 175% year-over-year and up 83% quarter-over-quarter. Two existing CSP/large data center customers represented 26% and 11% of total revenues for Q2. Emerging 5G, Telco, Edge, IoT revenues were $35 million or 1% of Q2 revenues. Growth was driven by AI/GPU and rack-scale total IT solutions, which again represented over 50% of total revenues this quarter, with AI/GPU revenues in both the enterprise/channel and the OEM appliance/large data center verticals. Server and Storage Systems comprised 94% of Q2 revenue, and Subsystems and Accessories represented 6%. Average Selling Prices increased on a year-over-year and quarter-over-quarter basis, driven by product and customer mix. By geography, the US represented 71% of Q2 revenues, Asia 18%, Europe 8%, and the rest of the world 3%. On a year-over-year basis, US revenues increased 139%, Asia increased 98%, Europe decreased 8%, and the rest of the world increased 67%. On a quarter-over-quarter basis, US revenues increased 61%, Asia increased 191%, Europe increased 51%, and rest of the world increased 37%. The Q2 non-GAAP gross margin was 15.5%, which was down quarter-over-quarter from 17% as we continued to focus on winning strategic new designs and gaining market share. Turning to operating expenses, Q2 OpEx on a GAAP basis increased by 6% quarter-over-quarter and 58% year-over-year to $193 million, driven by higher compensation expenses and headcount. On a non-GAAP basis, operating expenses increased 18% quarter-over-quarter and 41% year-over-year to $153 million. Q2 non-GAAP operating margin was 11.3% versus 10.8% last quarter as we benefited from operating leverage driven by higher revenues. Other Income and Expense for Q2 was a net expense of approximately $16 million, consisting of $8 million in interest expense and a loss of $8 million principally from foreign exchange. Interest expense increased sequentially as we drew down on short-term bank credit facilities for working capital during the quarter. The tax provision for Q2 was $61.5 million on a GAAP basis and $71.1 million on a non-GAAP basis. The GAAP tax rate for Q2 was 17.3% and the non-GAAP tax rate was 17.8%. Q2 non-GAAP diluted EPS of $5.59 exceeded the high end of our initial guidance of $4.40 to $4.88 and slightly above our recently updated guidance of $5.40 to $5.55 due to operating leverage. Cash flow used in operations for Q2 was $595 million compared to cash flow generated by operations of $271 million during the previous quarter. Strong profitability and a higher level of accounts payable were offset by higher inventory and accounts receivable due to build plans for Q3 and the timing of shipments during Q2. CapEx was $15 million for Q2 resulting in negative free cash flow of $610 million versus positive free cash flow of $268 million last quarter. During the quarter, we executed an equity offering and raised approximately $583 million in net proceeds after underwriting discounts and other issuance costs from the sale of 2.3 million shares at a price of $262 per share. The proceeds will be used to strengthen our working capital, enable continued investments in R&D, and expand global capacity to fulfill strong demand for our leading platforms. The closing balance sheet cash position was $726 million, while bank debt was $376 million, resulting in a net cash position of $350 million versus a net cash position of $397 million last quarter. Turning to the balance sheet and working capital metrics compared to last quarter, the Q2 cash conversion cycle was 61 days versus 86 days in Q1. Days of Inventory decreased by 24 days to 67 days versus the prior quarter of 91 days due to the timing of shipments during the quarter. Days sales outstanding was down by 14 days quarter-over-quarter to 29 days, while days payables outstanding decreased by 13 days to 35 days. Now, turning to the outlook, we expect a strong March quarter as we continue to gain momentum with new and existing customers for our AI and rack-scale total IT solutions. For the third quarter of fiscal 2024 ending March 31, 2024, we expect net sales in the range of $3.7 billion to $4.1 billion, GAAP diluted net income per share of $4.79 to $5.64, and non-GAAP diluted net income per share of $5.20 to $6.01. We expect gross margins to be slightly lower than Q2 levels. GAAP operating expenses are expected to be approximately $201 million and include $39 million in stock-based compensation expenses that are not included in non-GAAP operating expenses. The outlook for Q3 of fiscal year 2024 diluted GAAP EPS includes approximately $28 million in expected stock-based compensation expenses, net of tax effects of $14 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to be a net expense of approximately $9 million. The company's projections for Q3 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 13.8%, a non-GAAP tax rate of 15.8%, and a fully diluted share count of 60.1 million for GAAP and 61.0 million for non-GAAP. We expect CapEx for Q3 to be in the range of $18 million to $21 million and a range of $105 million to $115 million for the fiscal year 2024.

Operator, Operator

Michael, we're now ready for Q&A. It's also been asked to keep yourself to one question with one follow-up question. We'll pause here briefly as questions are registered. Our first question is from George Wang with Barclays. Your line is now open.

George Wang, Analyst

Hey guys, congrats on the quarter on a strong guide. I have two questions. Firstly, can you kind of supply versus demand, obviously for the December quarter probably driven by both including supply and also strong demand. So, if you can maybe talk about backlog level and also on the supply side, are there still ongoing constraints right now?

Charles Liang, CEO

Yeah, thank you for the question. Indeed, the demand is still stronger than supply. So, we have more supply; we would be able to ship more, and we are very happy to continue and grow our capacity, working out betas, even higher support to grow business even quicker.

George Wang, Analyst

Okay, thank you. And quickly a follow-up just on the liquid cooling. You talked about kind of expanding to 1,500 racks per month after June this year, and maybe you can talk about your expectation for the total production mix from liquid-cooled racks by year-end, and also maybe you can parse out kind of difference, the configure within the liquid cooling. I know you guys have some immersion cooling and air to liquid cooling. So maybe you can double-click on this thematic topic going forward.

Charles Liang, CEO

Thank you, George, for the question. In liquid cooling, we are outperforming the industry. We have significant capacity and a fully developed solution ready, but many customers are still in the process of integrating liquid cooling into their data centers. Their infrastructure needs more time to adapt. We believe that liquid cooling will become increasingly important, and we are committed to supporting our customers, including assisting with their data center infrastructure. I think the proportion of liquid cooling will keep rising, but currently, most shipments are still air-cooled.

Operator, Operator

Our next question is from Samik Chatterjee with J.P. Morgan. Your line is now open.

Samik Chatterjee, Analyst

Thanks for taking my questions and congrats on the strong results here. Maybe, if I can just start with the gross margin. You did have a step-down here in 2Q, you're guiding to a slight moderation in 3Q. Maybe just help me understand, as a management team, how do you think about balancing the opportunities that you've going forward in terms of market-share wins and design-wins relative to sort of big growing profitably over the long-run, how you sort of evaluating those opportunities side-by-side and then I have a follow-up. Thank you.

David Weigand, CFO

Sure, thanks, Samik. So, when we win a new customer, we always try to go in and out. And so we go into the organization and try to spread out into the different divisions. And to do that, as we take on new customers, we do evaluate and try to win the business, which requires us to be competitive. And so, we are always balancing in the interest of shareholder value, how to maximize that. At this time, we are growing really quickly. And in order to take market share, we will take opportunities by being more competitive on pricing.

Charles Liang, CEO

The good thing is that when we continue to grow our economies of scale, our operating margin will indeed still be able to keep in a healthy position.

Samik Chatterjee, Analyst

Got it. And then just this more near-term question when I look at the revenue guide for 3Q and 4Q. Is a step-up here in revenue of about sort of call it $0.5 billion a bit less going from 2Q to 3Q. And then a bigger step-up to get to the mid-point to be annual guide into 4Q, how much of that is driven by just being a bit more cautious about when supply comes in and pushing that the revenue guide a bit more to the 4Q or is that really what the visibility currently of supply of just trying to get sort of what's driving the cadence from 2Q to 3Q to 4Q. And the guide that you provided. Thank you.

David Weigand, CFO

Yeah, so Samik, we have a very large and growing backlog, which grew again this quarter. And so really as Charles mentioned earlier, our only constraint is supply. However, the good news is, supply is improving. And so to your point, we have to be somewhat conservative, because we are constrained still by supply.

Operator, Operator

Our next question is from Nehal Chokshi with Northland. Your line is now open.

Nehal Chokshi, Analyst

Yeah, thanks. Great impressive guidance and thanks for explanation regarding the dynamic on the forward guidance for both March quarter, plus the June Q guide. Looking at the incremental revenue for the December quarter. Dave, you already alluded to this, you're making shareholder accretive decision. That's what's driving the tick down in the gross margin, yet, your operating margin has improved, Q-over-Q. So just to be clear, when you're talking about making shareholder accretive decision, it's still with respect to current revenue not just simply looking at future free cash flows associated with future revenue follow-on from these lower-margin opportunities, is that correct?

David Weigand, CFO

It's really about trying to maximize shareholder value. So to address your point, we know that due to our tight control over operating expenses, if we receive more volume from a large customer, we can deliver more earnings per share to our shareholders. So that really underscores the importance of partnering with a strong customer.

Nehal Chokshi, Analyst

Got it. Okay. And then did you review the 10% revenue customers for the quarter?

David Weigand, CFO

We did, where we said we had two, one at 25% and one at 11%, both in the CSP large data center vertical.

Operator, Operator

Our next question is from Jon Tanwanteng with CJS Securities. Your line is now open.

Jon Tanwanteng, Analyst

Hey, good afternoon, and thank you for taking my questions. Congratulations on the fantastic growth. Charles, my first question is for you. What gives you the confidence in the growth beyond this year? You mentioned the ecosystem potentially driving years and decades of demand. Where is the visibility coming from, and what are you seeing in your backlog, order books, and conversations with customers that gives you that confidence?

Charles Liang, CEO

Yeah, thank you for the question. Yes, I mean, other than generative deep learning segment continuing to grow very strong, our inferencing opportunity in general CPU customer base is also growing. So with AI continuing to be more popular, indeed, many verticals around the world need more inferencing solutions as well, including private cloud, private kind of data center, and we are continuing to grow across various directions and we see positive feedback and convincing feedback.

Jon Tanwanteng, Analyst

Got it, and to ask one of the questions that's been mentioned in a different way, is there a gross margin floor as you pursue this share gain. And when do you see a possible inflection? I'm just wondering what is the limit. When you go in terms of gaining share versus the margin that you generate?

David Weigand, CFO

Sure, so we set out a target back in March of 2021 of 14% to 17%. But that's and we've actually done pretty well against that target. But one thing I'll say is that there are a lot of initiatives that play into our favor. Number one, we're doing a lot in terms of expansion to lower our cost envelope. Number two, our advantage is our building block solutions and what that means is we're the fastest to market because of the way that we have architected our products. So what that means is there are a lot of new technologies that are coming out from many different technology providers. We expect to again, as we work with AI, be first-to-market with those. And that first-to-market advantage helps us to differentiate ourselves as we come out with a complete set of solutions. So, we think that's another thing that will always play to Super Micro's advantage.

Charles Liang, CEO

Yeah, especially we have a broad building block solution. So, economies of scale will help our building block solution to be more efficient because there's a lot of product in our volume, which are still in the middle size to small size volume and we will continue to be aggressive to grow in every segment, every vertical that we have to achieve economies of scale.

Operator, Operator

Our next question is from Quinn Bolton with Needham. Your line is now open.

Quinn Bolton, Analyst

Thanks for taking my question and congratulations on the excellent results. I wanted to ask about gross margins, as they have moderated in the current and upcoming quarters. As you aim for further market-share growth, is the midpoint of the 14% to 17% range you established in 2021 the appropriate target to consider while remaining aggressive in driving market share? Additionally, if supply catches up with demand and growth rates begin to slow, will you shift your focus more towards higher-margin business? Any insights on where the 14% to 17% margin range might trend over the next year or two would be appreciated.

David Weigand, CFO

The most important principle is understanding why our base would prioritize shareholder value for our company. We previously indicated a range of 14% to 17% in 2021, and any changes or adjustments will depend on shareholder considerations. We are currently evaluating that range on a monthly basis.

Charles Liang, CEO

You are right. In these current 600 watt, 700-watt modules, people can still take care of cooling with air conditioning. And that's why people are still comfortable with our traditional air cooler. But when that system grows to 1,000 or even 1,000-watt per module, then cooling becomes critical. So, by that time, I believe most of the data centers will have the facilities ready for that. So we are very optimistic and very patient to continue to improve our quality, especially reliability and ease of maintenance. So when customers are ready, we can deliver quickly to support them.

Operator, Operator

Our next question is from Aaron Rakers with Wells Fargo. Your line is now open.

Aaron Rakers, Analyst

Yeah, thanks for taking the questions and also great results. Just curious, when you talk about your customer concentration and the diversity of the business, when you talk about 26% and 11% of your revenue coming from two customers, are those the same customers as last quarter? I think you had a customer that was 25%, or are you seeing these customers kind of bounce around? I guess the simple question is just, is that the same customer 26% and 25%?

David Weigand, CFO

So, Aaron. The 26% customer is the same customer. But the 11% customer is not a new customer; it's a longer-term customer. But first time at 11% and to your point, yes, we do see some customers bouncing in and out, and we're very happy. Anytime they do bounce, by the way.

Charles Liang, CEO

Yeah, and that's why economies of scale are very important to us when we further grow our total revenue; we will have a more large-scale customer and more middle-sized and small-sized customers as well.

Operator, Operator

Our next question is from Ananda Baruah with Loop Capital. Your line is now open.

Ananda Baruah, Analyst

Good afternoon, everyone. Thank you for taking my question. I appreciate the solid execution. I have two questions, Charles. First, I did some calculations on the 15,000 racks per month, which came out to about $5.6 billion a quarter, roughly 5.5%. Is that accurate? Also, if we consider this midyear, is this the type of run-rate opportunity we should anticipate quarterly, rather than as guidance, especially as we move into the latter part of the calendar year? I want to make sure we're understanding this correctly. I have a quick follow-up as well. Thank you.

Charles Liang, CEO

Yeah, again, we see green computing everywhere. That's why wherever we can help a customer at base, we will. That's why we have been building large-scale capacity for liquid cooling and other green computing solutions. So yes, that capacity will be huge, but its capacity is there, and when customers need, we are ready. Our facility is also very flexible. Lots of facilities can support liquid cooling, air cooling, or a combination of cooling. So yes, we have a huge capacity ready for growth, but not necessarily all for liquid cooling, as they support air cooling or hybrid cooling as well.

Ananda Baruah, Analyst

Thank you for that. Can you provide some details about the new customers you mentioned on the call related to your accelerated growth? It would be helpful to know what industries they represent or any specific projects they are involved in.

Charles Liang, CEO

Thank you. We have put significant effort into automating our sales and operational processes. These automation systems for sales, production, and support greatly increase our capacity. As a result, we can engage with and support more customers now. Additionally, achieving economies of scale is crucial for our operating margin and overall earnings per share. Therefore, we are now well-positioned for much faster growth.

Operator, Operator

Our next question is from Jon Tanwanteng with CJS Securities. Your line is now open.

Jon Tanwanteng, Analyst

Hi, thank you for the follow-up. I was just wondering if there is any change to your OpEx growth formula. It's been on a trailing basis, less than half of our revenue growth is as you grow bigger and do you expect to run against any limit in supporting such a large customer base and potential customer base or are you getting more economies of scale as you grow larger with that?

Charles Liang, CEO

Yeah, indeed we had been some low-volume company for too long, a 30-year-old company. So our volumes just started to grow in kind of good economies of scale just recently. And we like to take this chance to continue to grow our economies of scale. So when our economies of scale grow, we leverage the automation system again for sales, for operations, and for service. And that's why we are in a good position to continue growing quickly.

Jon Tanwanteng, Analyst

Okay, great. And then I was just wondering at the rate of growth that you're seeing, do you expect to need more external financing? I know you talked about other sources of cash, I was wondering, if you are going into the debt markets, what the plans are to finance this growth.

Charles Liang, CEO

Yeah, our financial team has been very diligently working on more sources, especially trying to minimize dilution of the stock equity. So we have a program steady and ready there. So when we need more capital, we are ready.

David Weigand, CFO

Yeah, I’ll just echo what Charles said, we're looking at a number of different things, Jon, and we are mindful of not having further dilution, as Charles said. So, we're looking at a number of different opportunities. And the reason we have to is that we need more working capital for growth. The reason that our cash flows were not as strong as last quarter was simply because we grew by so much. So if you grow by over $1 billion in quarter, you've got to have additional working capital. So that's the plain and simple fact.

Charles Liang, CEO

Our inventory had been growing more than $1 billion.

Operator, Operator

Our last question will be from Nehal Chokshi with Northland. Your line is now open.

Nehal Chokshi, Analyst

Yeah, great, thanks for the follow-up question. And I actually have two follow-up questions. First, at the September quarter earnings call I think you guys said the capacity was around $18 billion, that's up from $15 billion to June 2023 quarter. What's the driver of that actually increased capacity or increased ASPs? And then, in relation to that, your full-year guidance that implies a June Q guidance of around $4.7 billion, that implies that your annualized capacity is reaching $19 billion. And so as your capacity is increasing. Is this largely a mix-driven like-for-like ASP driven or how has your capacity actually gone up prior to Malaysia coming online?

Charles Liang, CEO

Yeah. I mean our ASP gradually continues to grow while that unit number will grow much faster from now on; I guess. So that's why we need more capacity.

David Weigand, CFO

One thing I'll add, Nehal, is that in December, we shipped between $1.7 billion and $1.8 billion. That alone establishes a $19 billion capability.

Nehal Chokshi, Analyst

Okay. And then my other question is that typically going into the March quarter, revenue is seasonally down Q-on-Q, guiding to be up Q-on-Q. Usually when the revenue is down seasonally quarter-on-quarter, your cash conversion cycle goes on a Q-on-Q basis, this March quarter because you're projecting a Q-on-Q revenue increase, does that change your expectations on cash conversion cycle seasonality dynamics?

Charles Liang, CEO

Well. Yeah, because of the demand, it is very strong. So we believe this March quarter will be a strong quarter as well. David, is there anything to add to that?

David Weigand, CFO

Yeah, it really comes down, Nehal to timing. When we receive inventory and when we ship out, so as I mentioned in the December quarter, you can have big activity even within a month, within the quarter, and so that will affect your metrics.

Nehal Chokshi, Analyst

Okay, I'm talking about the December quarter; your cash conversion cycle was actually a lot better than what we had expected. And yes, I recognize there was consumption of cash, but it was at least a lot better than what we had expected. Was that actually better than what you had expected, given the significant revenue upside that you had delivered here?

David Weigand, CFO

It absolutely was, yeah. We had some customer prepayments and things which helped us out.

Charles Liang, CEO

Yeah, also when economies of scale grow, we can more efficiently leverage our inventory as well.

Nehal Chokshi, Analyst

Okay, great. Congrats guys. Thank you.

Operator, Operator

That concludes today's conference call. Thank you all for your participation. You may now disconnect your line.