Earnings Call Transcript - SMCI Q4 2024

Operator, Operator

Thank you for standing by. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer Incorporated SMCI US Q4 2024 Earnings Call. With us today, Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Michael Staiger, Vice President of Corporate Development

Good afternoon and thank you for attending Supermicro's call to discuss financial results for the fourth quarter, which ended June 30th, 2024. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; and David Weigand, Chief Financial Officer. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our press release was issued after the close of the market and is posted on our website, where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at ir.supermicro.com. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive, industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to those public filings, including our most recent Annual Report on Form 10-K. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Supermicro Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Supermicro. Our first quarter fiscal 2025 quiet period begins at the close of business, Friday, September 13th, 2024. And with that, I will turn it over to Charles.

Charles Liang, CEO

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

David Weigand, CFO

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

Operator, Operator

Thank you, Michael. Our first question today is from Michael Ng of Goldman Sachs. Please go ahead. Your line is now open.

Michael Ng, Analyst

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

Charles Liang, CEO

Okay. Thank you. I mean as to what we share, we continue to gain design wins and we see lots of new products available, including DLC liquid cooling and Datacenter Building Block Solutions, and we see a lot of customer engagement and also more new customers like to engage with us. So with our capacity continuing to grow, $26 billion to $30 billion is our target for the next 12 months. As to gross margin, as we just mentioned, our DLC liquid cooling now has been very mature. So we are able to take advantage of that and also Datacenter Building Block Solutions that provides much better value and improves customers' datacenter time to online and also helps customers build their datacenter. So all of those will gradually increase our profitability.

Michael Ng, Analyst

Thank you, Charles.

Charles Liang, CEO

Thank you.

Operator, Operator

Our next question today is from the line of Samik Chatterjee of JPMorgan. Please go ahead. Your line is now open.

Samik Chatterjee, Analyst

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

Charles Liang, CEO

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

Samik Chatterjee, Analyst

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

Charles Liang, CEO

Yes. I mean, yes, we heard NVIDIA may have some delays, right? And we treat that as a normal possibility. When they introduce new technology, new product, there is always a chance for it to be pushed out a little bit. In this case, it pushed out a little bit. But to us, I believe we have no problem providing the customer with a new solution like H200 liquid cooling. We have many customers interested in that. So although we hope for a better deployment on schedule, and that's good for a technology company, this push out overall impact to us should not be too much.

Samik Chatterjee, Analyst

Okay. Thank you. Thanks for taking my question.

Operator, Operator

Our next question today is from the line of Ruplu Bhattacharya of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Ruplu Bhattacharya, Analyst

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

Charles Liang, CEO

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

David Weigand, CFO

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

Ruplu Bhattacharya, Analyst

And is that deployment expected to be linear for these liquid cool racks throughout the year or is it more back-end loaded? Thanks. Thanks for taking my questions.

Charles Liang, CEO

Basically, we support a handful of customers for liquid cooling. Most of them, once they try our liquid cooling, will continue to deploy higher percentages with liquid cooling because the hardware acquisition cost is about the same, but they will save a lot on energy costs. So I believe this growth will be consistently growing.

Ruplu Bhattacharya, Analyst

Thank you.

Operator, Operator

Our next question today is from the line of Ananda Baruah of Loop Capital. Please go ahead. Your line is open.

Ananda Baruah, Analyst

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

Charles Liang, CEO

Yes. Thank you. I mean, as you know, liquid cooling has been in the market for 30 years and market share compared with the overall datacenter size is always small, less than 1% or close to 1%, I would say. But just in June and July alone, we shipped more than 1,000 racks to the market. And if you calculate 1,000 racks, AI racks are more than 15% of global datacenter new deployment. So we are very happy. We are glad that the industry pushed from air-cooled to liquid cooling and to help customers save energy costs and reduce carbon footprint. At the same time, because of the liquid cooling, DLC liquid cooling datacenters require 30% to 40% less power, which helps customer datacenters become available quicker because they don't have to wait for a higher power budget from a power company. So overall, we see more customers liking our liquid cooling solution.

Ananda Baruah, Analyst

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

Charles Liang, CEO

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

Ananda Baruah, Analyst

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

Charles Liang, CEO

It's a very good question. I mean, last month, we had about 1,000 racks per month liquid cooling capacity. And today, we've already grown another 50%. So now we have a 1,500 rack per month capacity. By this year-end, we plan to grow that to 3,000 racks per month. That's with liquid cooling alone. So we really believe liquid cooling is a much better choice for the market, and we provide consultations to customers. Most customers, when discussing with our engineering team, they love liquid cooling. Again, we are strongly growing our customer base for liquid cooling, and we're really happy for that because minimizing power consumption has been a common value in the world, especially saving operational costs.

Ananda Baruah, Analyst

And that's fiscal year-end you say at the end of the year?

Charles Liang, CEO

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

Ananda Baruah, Analyst

Thank you.

Operator, Operator

Our next question today is from the line of Aaron C. Rakers of Wells Fargo. Please go ahead. Your line is open.

Aaron Rakers, Analyst

Yes. Thanks for taking the question. I've got two as well. I guess I want to go back to the earlier question on Blackwell just because I think it's going to be a key focal point for a lot of investors here especially as we kind of shape the full year guidance. So Charles, I want to be clear. So has your guidance contemplated as we think about the December quarter, do you believe that you'll be shipping the Blackwell platform solutions for revenue in the December quarter or should we think of the full year guidance as a bit more weighted to the back half of the fiscal year given some concerns around the timing of Blackwell availability and NVL36 and NVL72 platforms, etc.? I'm just curious how you want us to have the street think about the cadence of that full year guidance shaping up on a quarterly basis. Appreciate you're not going to give quarter-by-quarter guidance.

Charles Liang, CEO

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

Aaron Rakers, Analyst

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

David Weigand, CFO

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

Charles Liang, CEO

Especially for the June quarter.

David Weigand, CFO

Yes, for the June quarter.

Aaron Rakers, Analyst

Is that the majority for the 430 basis point decline?

David Weigand, CFO

Well, no, I think. I would say half was targeting specific accounts like we announced last quarter. And the other half was really the higher supply costs that we encountered.

Aaron Rakers, Analyst

Yes. Very helpful. Thank you, guys.

Operator, Operator

Our next question today is from the line of George Wang of Barclays. Please go ahead. Your line is now open.

George Wang, Analyst

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

Charles Liang, CEO

Yes. Again, like what I just mentioned with our Taiwan capacity getting bigger and Malaysia capacity will be ready, we are fully ready for large scale datacenter customers, but we will be selective. That's why we foresee only $26 billion to $30 billion. If we tried to be more aggressive in a large scale, our growth can be even faster than that. But we try to grow in both ways enterprise and large scale datacenter kind of try to balance so to maintain our healthy profitability.

George Wang, Analyst

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

Charles Liang, CEO

Liquid cooling, I mean, for sure, is necessary and it's very helpful for Blackwell solution. Although Blackwell solution was pushed out a little bit. But indeed we enable liquid cooling for H100 and H200 as well and a lot of customers are interested in our H100 and H200 liquid cooling now indeed. So liquid cooling is from our position we'd like to support the whole datacenter, not just Blackwell.

George Wang, Analyst

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

David Weigand, CFO

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

George Wang, Analyst

Okay. Great. I will go back to the queue. Thank you.

Operator, Operator

Our next question is from the line of Jon Tanwanteng of CJS Securities. Please go ahead. Your line is open.

Jonathan Tanwanteng, Analyst

Hey, good afternoon. Thank you for taking my question. I was wondering if you could just talk, given your time to market and volume capabilities and liquid cooling, the energy and compute advantages, can you walk through what your pricing strategy is and why not pass those costs on especially relative to the value that you're providing? Is it a stronger competitive environment close to behind you or are you effectively trying to get ahead of them and get that share first?

Charles Liang, CEO

Yes, I mean, indeed, the liquid cooling from our point of view is really a good value to the whole market and our whole planet because of less energy consumption, right? So we enable liquid cooling primarily for Blackwell, right, because Blackwell requires higher power, that's for sure. Lots of cases need liquid cooling. But we enable that for H100, H200 and regular CPU as well. Because overall liquid cooling, once mature, once economical scale is good enough, is good for all different kinds of computing. And not exactly now, we are promoting, and a lot of our customers continue to show interest in our liquid cooling even enough for Blackwell.

Jonathan Tanwanteng, Analyst

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

Charles Liang, CEO

Okay. For June, it's really a unique quarter because we deployed lots of liquid cooling and we paid many exploration costs. So that makes our June gross margin much worse. But now, indeed, our liquid cooling technology has been getting very mature, and we have a high volume now. So our liquid cooling costs are now more favorable. However, we try to promote liquid cooling as a mainstream product solution. So we try not to add too much value to customers. Instead, we try to gain market share and make liquid cooling everywhere.

David Weigand, CFO

Well, so we expect to be above 12% in the first quarter, and we'll be working very hard to move back into the range as we mentioned as quickly as we can.

Charles Liang, CEO

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

Jonathan Tanwanteng, Analyst

Great. Thank you, guys.

Operator, Operator

Our next question is from the line of Mehdi Hosseini of SIG. Please go ahead. Your line is open.

Mehdi Hosseini, Analyst

Yes. Thanks for taking my question. I just have two housekeeping items. David, what kind of other income did you have in the June quarter? You did say that you had interest income of $12 million that you realized in the June quarter?

David Weigand, CFO

That was a net figure, Mehdi. So we actually had $20 million of interest income, but that was offset by some adjustments, too, some investment adjustments which brought it down lower.

Mehdi Hosseini, Analyst

But the $20 million is that interest income? The $20 million is that interest income?

David Weigand, CFO

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

Mehdi Hosseini, Analyst

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

Charles Liang, CEO

Not necessarily. I mean if we try to aggressively grow market share maybe if we forecast at $30-something billion, in that case, we may need more. But if we try to focus on below $30 billion, then it's not necessary.

David Weigand, CFO

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

Mehdi Hosseini, Analyst

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

David Weigand, CFO

No, we are not providing guidance on that time.

Mehdi Hosseini, Analyst

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

David Weigand, CFO

We have other expansion projects underway in the US, but we don't have anything to announce today.

Mehdi Hosseini, Analyst

Got you. All right. Thank you, Dave.

Operator, Operator

Our next question today is from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead. Your line is now open.

Nehal Chokshi, Analyst

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

Charles Liang, CEO

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

Nehal Chokshi, Analyst

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

Charles Liang, CEO

Yes, liquid cooling is very high efficiency in cooling, right? So it allows CPU, GPU and other components to run at a lower temperature, and then in a lot of cases, it can optimize customers' datacenter performance significantly, right, a couple of percentage to even high single-digit percentage. So a lot of customers really like DLC at this moment.

Nehal Chokshi, Analyst

Okay. And then my follow-up question is that, I think, June 21st, you did an 8-K after market close, leasing significant datacenter space from Prime Datacenter and then you're leasing it back to Lambda Labs. It seems like a rather odd arrangement. Can you guys talk about the purpose of doing this?

David Weigand, CFO

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

Nehal Chokshi, Analyst

Okay. Thank you.

Operator, Operator

Thank you. And our next question is from the line of Thomas Blakey of Key Corp. Please go ahead. Your line is now open.

Thomas Blakey, Analyst

Hi, everyone. I appreciate you taking my questions. I have a few here. David, could you talk about the shift in the revenue mix for AI rack scale this quarter? Did it increase compared to the previous quarter in June?

David Weigand, CFO

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

Thomas Blakey, Analyst

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

Charles Liang, CEO

Yes. Customers like our high-density computing solution, especially per rack. That's why you say 64 GPU or more GPU, right? So we are very efficiently providing the customer for whatever configuration they like. And very soon we will allow something even better for sure.

Thomas Blakey, Analyst

So to be clear, did you ship 3,000 racks in that configuration to those three customers during the quarter?

Charles Liang, CEO

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

David Weigand, CFO

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

Thomas Blakey, Analyst

That's clear. Okay.

Operator, Operator

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