Earnings Call Transcript - SMCI Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Super Micro First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. Please follow the operator instructions. At this time, I would like to turn the conference over to Nicole Noutsios, Investor Relations for Super Micro. Please go ahead.

Nicole Noutsios, Investor Relations

Good afternoon, and thank you for attending Super Micro’s call to discuss financial results for the first quarter, which ended September 30, 2021. By now, you should have received a copy of the news release from the Company that was distributed at the close of regular trading and is available on the Company’s website. As a reminder, during today’s call, the Company will refer to a presentation that is available to participants in the IR section of the Company’s website under the Events & Presentations tab. We have also published management’s scripted commentary on our website. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook, including guidance for the second quarter of fiscal year 2022 and the full fiscal year 2022, and the potential impact of COVID-19 on the Company’s business and results of operations. There are a number of risk factors that could cause Super Micro’s future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2021, and our other SEC filings. All of these documents are available on the Investor Relations page of Super Micro’s website. We assume no obligation to update any forward-looking statements. Most of today’s presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today’s press release and the supplemental information attached to today’s presentation. At the end of today’s prepared remarks, we will have a Q&A session for the sell-side to ask questions. With that, I’ll now turn the call over to Charles Liang, Founder, Chairman and Chief Executive Officer. Charles?

Charles Liang, CEO

Thank you, Nicole, and good afternoon, everyone. I am pleased to announce that our quarterly revenue exceeded $1 billion, even during a traditionally weak September quarter. For fiscal Q1 2022, we delivered strong year-over-year revenue growth of 35%. We continued to gain market share and are executing well against our plan to achieve $10 billion in annual revenue. The revenue growth was driven by strong progress across many key customers with our Total IT Solution strategy. Now, let’s look at some highlights from the quarter. First, our first-quarter net revenue totaled $1.03 billion. It’s our second consecutive quarter of over $1 billion in revenues, up 35% year-on-year and down 3% quarter-on-quarter, exceeding our guidance of $900 million to $980 million. Our efforts continue to enable our growth trajectory at multiple times the average industry growth rate. Our fiscal first-quarter non-GAAP earnings per share was $0.58, compared to $0.55 in the same period one year ago and higher than our guidance of $0.28 to $0.48. All our major geographies contributed significant year-over-year growth, with the APAC region including Japan doubling year-over-year. The newly completed Taiwan expansion at Bade is greatly helping our Asia and EMEA growth momentum by providing additional capacity and lowering operational costs. These results show that we remain on track to achieve our $10 billion revenue target as we previously shared. We started our business with the best system building block solutions on the market 28 years ago. After many years of servicing System Integrators and Value-Added Resellers, we began to offer application-optimized complete systems to direct partners including many appliance partners, OEM, and large enterprise accounts. In the past 10 years, we have continued to expand and begun our business transition from a hardware solutions company to a Total IT Solutions company that combines hardware, software, service, and more features. With application-optimized Total IT Solutions for many vertical markets and a much broader technology footprint today, we are redefining our growth drivers to accelerate our growth strategies. First, Sub-system and Components; we will continue to offer server motherboards, enclosures, barebones, and accessories to the market to continue to help grow our market share. Second, Complete Systems; we will fully focus and expand on growing our complete hardware systems with technologies co-developed with our key partners including Intel, AMD, NVIDIA, Broadcom, and others. Third, Total IT Solutions; we are accelerating our broad development of Appliance and Plug-n-Play Rack-Scale Solutions for AI, Machine Learning, Industry Automation, IoT, 5G/Telco, and Cloud products. And number four, 5S; we are finally ready to aggressively promote our Software, Service, and Switch Product lines. Our building blocks and completed systems business have been steadily growing over the decades, serving as the backbone of our revenue growth. With more enterprise customers and appliance partner engagements, our Rack Scale and Total IT Solutions business is our new major growth focus now. To make our Total IT Solutions a seamless experience for our customers, we have been increasing our R&D resources to focus on many software products, service, and networking for many years. These products, as higher value parts of our Total IT solutions, will be key to improving our margins and profitability in the coming quarters and years. Our new online auto-configurator together with our new B2B program is now driving our business growth more efficiently than ever before. Our innovative new command center-based customer service system has been greatly helping our sales, FAE, PM as well as our key customers. They are dramatically improving our business interactions with customers—much faster, much more accurate, more optimized, and more customer-friendly—while reducing manpower, human delay, and error. Our new intelligent database-driven tools are indeed performing much smarter and faster than human efforts in most areas. This automated intelligent system is servicing our salesforce and customers to their great satisfaction now, and it will be constantly upgraded and updated. Our push toward Total IT Solutions is benefiting Super Micro and our customers in multiple ways. Most importantly, our customers will receive higher-quality products that are fully optimized, integrated, and validated in-house. For the PnP, Plug-n-Play Rack-Scale products, our customers just need to connect network and power cables, and then be ready to run the application. This shrinks their deployment time from many weeks to just a few hours. The Total IT Solutions are helping Super Micro and our customers to mitigate the impact of global shortages and supply chain disruptions by accurately forecasting, building inventories in scale, and prioritizing with our strategic partners. The system building block solution allows us to utilize sets of common sub-systems and components to create, design, and deliver first-to-market products with reduced manufacturing and supply chain complexity and risk. This will dramatically improve our customer’s time-to-market, which is critical to their success. The Total IT Solution is indeed a win-win-win proposition for Super Micro, our customers, and our supply chain partners. Customers can experience our Total IT Solutions now by signing up for our new JumpStart Program. They can remotely run their software and applications on our preconfigured, pre-validated racks powered by the latest technology from Intel, AMD processors, and NVIDIA. We are also providing hosted instances of Plug-n-Play Cloud Infrastructure with operating systems and other tools that can be accessed remotely for development and testing. The program will instill more confidence in Super Micro customers as it delivers convenience, faster time to market, performance optimization, cost savings, and security. In summary, Super Micro is rapidly growing and transforming into a Total IT solution company from a server hardware company. In addition to providing the greenest hardware total solution, our software, switch, and service products are now ready for any large enterprise, cloud, AI, and Telco customers. We are building on and expanding our successful product and technology leadership. Our new growth factors, including Total IT Solutions and the fast-growing 5S product lines, are keys to achieving our $10 billion revenue target with higher profitability. Lastly, replicating our market share success in the U.S. to APAC and EMEA with the completion of our new APAC campus in Taiwan. Additionally, our new Command Center Based Auto Configurator and B2B Automation platforms are getting broadly used by customers around the world, accelerating our market-share gains and customer satisfaction. In closing, I am very pleased with the progress of our business transformation, which is resulting in an acceleration of our business in fiscal 2022 and beyond. As a Total IT Solutions company, our TAM continues to increase as we invest our resources for growth, and I am optimistic about achieving our $10 billion annual revenue goal on a much sooner schedule. With that, I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional detail. Thank you.

David Weigand, CFO

Thank you, Charles. We continued to experience diversified growth across our key market verticals, exceeding $1 billion in revenue for the quarter, above the high end of our guidance range. This is the second consecutive quarter that revenues have exceeded $1 billion. Revenue growth was driven by sales to large enterprise, cloud, AI, and Telco markets, continued strength across all geographies, and strong demand for our products and services. Our fiscal first-quarter revenue totaled $1.03 billion, reflecting a 35% year-on-year increase and a 3% decrease on a quarter-over-quarter basis. Looking at Super Micro’s Q1 revenue in our three market verticals, we achieved $725 million in the Organic Enterprise and Channel AI/ML vertical, $250 million in the OEM appliance and large data center vertical, and $58 million in the 5G/Telco and Edge/IoT vertical. Systems comprised 82% of total revenue, and the volume of systems and nodes shipped was up year-over-year. System node ASPs increased year-over-year and quarter-on-quarter. On a year-on-year basis, Asia increased 108% as we saw continued growth with both existing and new customers, Europe increased 60%, the U.S. increased 13%, and Rest of World increased 6%. On a sequential basis, Asia increased 29%, U.S. sales decreased 14%, Europe decreased 3%, and Rest of World decreased 1%. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q1 gross margin was 13.4%, down 30 basis points quarter-over-quarter from Q4 due to higher freight and supply chain costs, as was also reported by many other companies around the world. On a year-over-year basis, gross margins were down 370 basis points due to a discrete cost recovery event in Q1 of last year, while also incurring higher freight, supply chain, and other costs in Q1 of the fiscal year 2022. Turning to operating expenses, Q1 OpEx on a GAAP basis increased 2% quarter-on-quarter and 10% year-on-year to $109 million. On a non-GAAP basis, operating expenses increased 2% quarter-on-quarter and increased 7% year-on-year to $101 million. The year-on-year and quarter-on-quarter increases on a GAAP and non-GAAP basis were driven primarily by higher personnel expenses due to increased headcount, especially in Asia. Other Income & Expense including interest expense was an $0.8 million expense, as compared to a $2.1 million expense last quarter. The sequential change is mostly related to FX. This quarter the tax provision was $3.3 million on a GAAP basis and $6.2 million on a non-GAAP basis. Our non-GAAP tax rate was 16.6% for the quarter. Lastly, our share of income from our JV was $0.4 million this quarter as compared to $0.6 million last quarter. Q1 non-GAAP diluted earnings per share totaled $0.58, which was higher than our mid-point guidance of $0.38 due to higher revenues and lower operating expenses, offset by lower gross margins. Cash flow used in operations was $134.6 million compared to cash flow generated from operations of $63.6 million in Q4 as we built inventory ahead of a seasonally strong December quarter and positioned ourselves to mitigate the impact of supply chain disruptions. Capital expenditures totaled $11.9 million, resulting in free cash flow consumption of $146.5 million. Key uses of cash during the quarter included increases to inventory, payments made to reduce accounts payable, offset by an increase in deferred revenue. We did not repurchase any shares in the quarter. Our closing cash balance was $270 million, while bank debt was $279 million as we drew down on our bank lines of credit to increase inventory to ramp production of new platforms globally. Turning to the balance sheet and working capital metrics compared to last quarter, our Q1 cash conversion cycle was 94 days, up from 80 days, above our target range of 85 to 90 days due to higher inventories. Days of inventory was 114, representing an increase of 18 days versus the prior quarter. Days Sales Outstanding was up by 4 days to 41 days, while Days Payables Outstanding was up by 8 to 61 days. Now turning to the outlook for our business. We expect net sales in the range of $1.1 billion to $1.2 billion. GAAP diluted net income per share of $0.60 to $0.80, and non-GAAP diluted net income per share of $0.70 to $0.90 for the second quarter of fiscal year 2022 ending December 31, 2021. We expect gross margins to improve as we manage supply chain costs and maintain price discipline. Over the upcoming quarters, we continue to expect to achieve margins within our target model as we further scale our Taiwan operations and begin to gain traction from our new product offerings and auto-configurator B2B/B2C solutions. GAAP operating expenses are expected to be approximately $112 million, including $7 million in stock option compensation expenses and $1 million in other expenses not included in non-GAAP operating expenses. We expect other income and expense, including interest expense, to be a net expense of roughly $1.5 million and expect a nominal contribution from our JV. Our non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D and higher personnel costs. The company’s projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 53.5 million shares for GAAP and 55 million shares for non-GAAP. The outlook for Q2 of fiscal year 2022, GAAP diluted net income per common share includes approximately $8 million in expected stock-based compensation and other expenses, net of tax effects, that are excluded from non-GAAP diluted net income per common share. We are raising our guidance for the fiscal year 2022 ending June 30, 2022, and now expect net sales in a range of $4.2 billion to $4.6 billion versus our prior forecast of $4.1 billion to $4.5 billion. GAAP diluted net income per share is expected to be at least $2.77 versus our prior forecast of $2.60. Non-GAAP diluted net income per share is expected to be at least $3.20 versus our prior forecast of $3. The company’s projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 54.1 million shares for GAAP and 55.6 million shares for non-GAAP. The outlook for fiscal year 2022 GAAP diluted net income per common share includes approximately $33 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal second quarter of 2022 to be in the range of $3 million to $5 million. I’ll turn it back over to you now, Nicole.

Nicole Noutsios, Investor Relations

Operator, now you can open up the line for questions.

Operator, Operator

The floor is now open for your questions. Please follow the operator instructions. Your first question comes from Ananda Baruah of Loop Capital.

Ananda Baruah, Analyst

Hi guys. Yes, listen. Good afternoon. Congrats and thanks for taking the question. I guess, a couple for me, just to start off, could you talk about, it seems like you’re highlighting both in the press release and then in your remarks new design wins, and speaking of them, broadly that there across the business. Could you maybe talk to what you saw that was those exciting for you and most incremental to the business throughout the quarter? And then I have a couple of follow-ups. Thanks.

Charles Liang, CEO

Yes. Thank you. A very good question. Yes, I shared that in the last few quarters, we started to engage more and more large enterprise accounts. Again, we have surpassed our ability to handle larger accounts in the last few quarters, including 5G/Telco, AI machine learning, and HPC as well. So pretty much across a broader range, we have more customers and with our B2B automation and auto configurator, as I just mentioned. Now we are able to have sales engineers and PA to communicate with customers much more efficiently. So now we have more bandwidth to talk to more customers and discuss their applications in more detail. I do believe we are continuing to engage more customers and achieving design wins.

Ananda Baruah, Analyst

That’s helpful context, Charles. Thanks. And how would you characterize, I guess, the - I don’t even know if I want to call it progress with the new Taiwan facility. Could you just describe for us the appropriate context so that we can understand what the operation feels like right now both from a production perspective, but also from a revenue-generating perspective as well?

Charles Liang, CEO

Yes. Thank you for the question. Yes. As I shared, we see in the last few quarters, Asian campus production capacity is very important to our business. In the USA, especially, our operation has been focused on our pay area for 28 years, which really cost too much. So we are very happy to finally have a big campus in Taipei, Taiwan, and now we have significant capacity ready. Indeed, today we are utilizing about less than 30% of our capacity. We have the capacity available in Asia now, which makes us very happy, and we are starting to aggressively engage customers in Asia and EMEA, even leveraging Taiwan's capacity to support customers in the USA. That’s a very positive change for us.

Ananda Baruah, Analyst

How long, Charles? Do you have any estimate on where you’ll get kind of normalized capacity utilization in the Taiwan facility?

Charles Liang, CEO

Good question. Because of the global shortage, our revenue could be much larger than $1.03 billion this quarter. We are at 30% utilization in Taiwan, and we expect that once the global shortage problem is resolved, we will be able to reach 80% to 100% capacity utilization in Taiwan within a few quarters. We have strong demand, and we just need the supply chain to improve.

Ananda Baruah, Analyst

That’s really helpful, Charles. I appreciate it. I’ll get back into the queue. Thanks a lot.

Charles Liang, CEO

Thank you.

Operator, Operator

Your next question comes from Mehdi Hosseini of SIG.

Mehdi Hosseini, Analyst

Yes. Thanks for taking my question. A couple of follow-ups on regarding the balance sheet and cash flow. Can you remind me how much more loan credit you have that you can utilize?

David Weigand, CFO

So we have a $200 million line of credit with the Bank of America, and we also have over $300 million in credit lines in Taiwan as well.

Mehdi Hosseini, Analyst

Okay. So after totaling to $500 million, that’s, I know with this being neutralized, right?

David Weigand, CFO

Yes. As you see from our balance sheet, we’re sitting at about $279 million.

Mehdi Hosseini, Analyst

Got you. Okay. And then regarding the growth, can you maybe, Charles or anybody from the team help me understand? What would the key growth drivers be in Asia, which was up more than double on a year-over-year basis, while the U.S., which is the largest market had a double-digit growth, but Asia was up even more? What were the key drivers behind that growth?

Charles Liang, CEO

Yes. Indeed, in Asia, we did not have really strong promotion before because our capacity was limited. Previously, we had to ship a lot from the USA to our customers in Asia. Now with the capacity in Taiwan much bigger, we are aggressively reaching out to customers in Asia, and we can also support European customers from Asia, which is a good arrangement. We will continue to invest more in our sales and marketing teams in Asia and EMEA as well as in the East Coast of the USA, which we see as a very sweet spot for us.

Mehdi Hosseini, Analyst

Yes, perhaps maybe if I rephrase the question, you highlight the three buckets of revenue, organic enterprise, OEM, and the Telco. Was there any particular end market that was particularly strong in Asia?

Charles Liang, CEO

AI, for example, and Telco—5G/Telco, for example. Our Asia market share was small before, so we have a lot of room to grow in Asia.

Mehdi Hosseini, Analyst

Got it. Thank you.

Charles Liang, CEO

Thank you.

Nicole Noutsios, Investor Relations

Next question, please.

Operator, Operator

Your next question comes from Nehal Choski of Northland Capital Markets.

Nehal Choski, Analyst

Yes. Thank you. And fantastic results, very strong guidance, great feedback. A couple of questions for me. Charles, what’s your perspective on whether the worst of global supply chain issues have passed or not? And then related to that, how long do you think it will be prudent to continue carrying more base inventory than typical?

Charles Liang, CEO

Very good question and a big question. As you know, we usually keep about $900 million in inventory, and now we've grown to almost $1.3 billion. The reason we have grown inventory so quickly is that we want to make sure we are doing our best to support our customers and to support our growth. We are continuing to improve our relationship with the supply chain, and it’s really a big shortage, especially in chips like those I/O chips. In some cases, CPUs are facing slow delivery as well, which creates logistics delays. However, because we are providing IP total solutions now, we handle all our difficult portions and keep a complete pattern play direct solutions for our customers, which most appreciate. So how soon can we fix those problems? It’s really a global issue. Many, including myself, would guess maybe three to four months and hopefully, one day things will improve.

Nehal Choski, Analyst

Great. Thank you for that perspective. And then following up on Mehdi’s question regarding regional performance, helpful on what’s driving Asia. David, you did say that the U.S. was down 14% in Q2. Is that seasonal, or is there something more going on there?

David Weigand, CFO

I think it’s simply just a matter of digestion. We had some very large purchases, and there was some digestion of those purchases, and we expect those to return.

Nehal Choski, Analyst

Got it. All right. I’m going to get back in the queue. You addressed some good questions as well. Thank you.

Operator, Operator

Your next question comes from Aaron Rakers of Wells Fargo.

Aaron Rakers, Analyst

Yes. Thanks for taking my questions, and also congrats on the quarter and the guide. Just kind of dovetailing off the component question. Everybody is definitely seeing supply constraints. I guess my question on that is, can you comment on what you’re seeing from a pricing perspective of some of the key components in the supply chain, be it memory or other components? And what you’re doing to maybe pass through some of that pricing? Or how effective you’ve been there?

Charles Liang, CEO

Yes. I mean, as you may know, right, memory prices are dropping now since last month, maybe two months ago. So memory supply is getting much better than before. Other components still have a significant shortage, and we foresee some IC prices will continue increasing. Even TSMC announced that on November 1, some of their product line costs will increase to their customers. Overall, I feel that we are seeing some improvement, but it won’t be immediate.

Aaron Rakers, Analyst

And how are you reacting with your own pricing?

Charles Liang, CEO

We basically pass through to our customers whatever we can, and customers are getting used to this model because we just cannot afford to absorb so much price rises. This year, customers pretty much understand that.

Aaron Rakers, Analyst

Yes. In this environment, a lot of companies have seen requests from their own customers to provide longer lead times on their own purchase commitments. Have you also asked your customers to lengthen their lead times and, therefore, given you more visibility in the business beyond this next quarter?

Charles Liang, CEO

Yes. Essentially, we hope so. But the problem is we cannot deliver even our back orders today. So that’s why we did not push customers to predict orders much earlier, but we hope they can be more transparent with us about their forecasts.

Aaron Rakers, Analyst

Yes. And then the final question, just kind of strategically. I’m curious about is the company is fairly well-positioned, given your engineering presence and breadth around the role of AI and the proliferation of AI from a compute layer perspective. Can you help us appreciate how material AI is? I’m assuming that the server platforms incorporating predominantly GPU are a big part of that business. How big is that business? How fast is it growing? And any kind of thoughts at a high level on how much that changes the weakness of the mix of your business compared to more traditional servers?

Charles Liang, CEO

Yes. AI-optimized servers are high-value, high-performance, and we are very aggressive in continuing to grow our AI machine portfolio. Indeed, our AI machine, which includes complete systems and some appliances, believes our market share is among the top one or top two, and I hope it is still number one. I believe it will continue to grow rapidly because we have been very focused on those high-end products, including Total Solution and AI Total Solutions. We are starting to ship AI Cloud to some of our partners, making our customer's jobs much easier. When we ship direct to customers, they receive targeted networking cables and power cables, and are pretty much ready to run their applications. So with Total AI Cloud and Total AI Solutions, I am very optimistic that our deep learning AI machines, including those for video streaming solutions, will continue to grow very fast.

Aaron Rakers, Analyst

Very helpful. Thank you, guys.

Charles Liang, CEO

Thank you.

Operator, Operator

Your next question comes from Jon Lopez of Vertical Group.

Jon Lopez, Analyst

Hi. Thanks very much. Can you hear me all right?

David Weigand, CFO

Yes, Jon. We can.

Jon Lopez, Analyst

Great. Thanks, David. So I had a couple of quick ones. I wanted to start on the inventory side as well. So I apologize for doing that, but if I remember correctly, I think your purchase commitments or inventory purchase commitments as of June were up $550 million, $575 million—something in that ballpark—and have doubled versus where they were at the end of 2020. Can you give us a feel for where that stands now as of the end of September? And just given the size of these increases, does that ultimately find its way onto your balance sheet? Or are you now in a steady-state level where what’s going out is more being matched with what’s coming in?

David Weigand, CFO

As I think the key is we’re going into a seasonally strong December quarter. That combined with the fact that we’ve got to make sure we get in ahead of supply chain delays as much as possible has really driven our decision to increase inventory levels. So therefore, in the current market with the delays, both on the delivery side and the production side, I must place orders earlier. So that’s why we are increasing credit lines and using them to increase inventory.

Jon Lopez, Analyst

Okay. Got it. And just off the top of your head, David, do you know where that number stood as of September?

David Weigand, CFO

I don’t release that number quarterly.

Jon Lopez, Analyst

Okay. All right. Great. Thanks for that. Secondly, I’m sorry, go ahead, please.

David Weigand, CFO

We’ll provide a little more color in the 10-K.

Jon Lopez, Analyst

Sure. Of course. Your deferred revenue actually jumped up quite nicely. The current deferred was up like double digits, which hasn’t really been the case for the last couple of quarters. Why was that?

David Weigand, CFO

So two reasons: we had some customers who prepaid, and we had some additional services that had an increase needing to be deferred.

Jon Lopez, Analyst

Okay. That’s helpful.

Charles Liang, CEO

That expands to, I just mentioned, we are starting to focus on our 5S business, which includes software, services, and hardware. These products have higher profitability but also generally have priority for revenue.

Jon Lopez, Analyst

Got it. That’s really helpful. Thanks. Sorry, two other quick ones. The first one is, David, I think you mentioned gross margin—I think you said it was going to increase. I wasn’t sure if that meant in the December quarter or that was just sort of an intermediate-term comment. But can you remind us, like, what are the targets again, and just put some color around that comment and how we should think about trending and trajectory?

David Weigand, CFO

Sure, absolutely. Our target model gross margin is, of course, 14% to 17%. We’ve mentioned that again, this quarter our transportation costs or freight costs went up by $3 million or 30 basis points, which was on top of the increase from the prior quarter. I can tell you from discussions with our operations people that it looks like that amount is starting to level off and that we are experiencing improvements. Therefore, the guidance we give is indicating that we expect improvement both in Q2 and into the second half.

Jon Lopez, Analyst

Gotcha. Really helpful. Okay. And sort of is that leveling off a relatively recent phenomenon, or is that something you observed through the course of the quarter?

David Weigand, CFO

That’s just a point, I mean, there has only been one month in this quarter, but thus far they don’t seem to be increasing at the same rate that they were in prior quarters.

Jon Lopez, Analyst

Gotcha. Okay. I’m sorry. I was trying to take the prior quarter. So they kept increasing through your fiscal Q1?

David Weigand, CFO

Yes. In other words, through Q4, they continued to increase. And then in Q1, they also increased another 30 basis points. So, I’m stating that in the current Q2, we see that leveling off.

Jon Lopez, Analyst

Gotcha. Really helpful. And so my very last one. Just as we consider your fiscal 2022 guidance, you mentioned that both units and prices increased in your September quarter. Excuse me, I’m wondering, as we think about this 20% odd growth you’re building in for fiscal 2022, can you give us a rough sense of how much of that will come from pricing versus what’s going to come from units?

David Weigand, CFO

I think that’s too hard to judge.

Jon Lopez, Analyst

Okay. Okay. Would your gut be that it’s going to be a combination of the two? Maybe I can leave it there.

David Weigand, CFO

Absolutely. Absolutely.

Operator, Operator

Your next question comes from Nehal Choski of Northland Capital Market.

Nehal Choski, Analyst

Yes. Thanks for taking my follow-up questions. And great on the breakout relative to the three colors of growth that you’ve laid out here, and I really appreciate that. Do you have color on how each of these trended on a year-over-year basis relative to the overall year-over-year growth?

David Weigand, CFO

Yes, so we’re not going back on a year-over-year basis in the verticals because we really started tracking this closely beginning with the fiscal year-end. As each quarter goes by, we will provide a little more insight. But I can tell you that the one vertical that went down was in the 5G—I'm sorry, the OEM, and OEM appliance, which I mentioned was due to digestion of large customers. We see that returning in Q2.

Nehal Choski, Analyst

Got it. Okay, great. And then what is the risk that the strong demand that you’re seeing is a result of the supply chain disruptions, and that you are having new customers come to you in an effort to triple source, or of course, triple source and effectively alleviate their own supply chain issues?

Charles Liang, CEO

Yes, this is a very important area, and we are monitoring it closely. Most of our orders are coming evenly from our customer base and at this moment, I do not see any specific trends. Overall, our building block solutions provide flexibility, and since we focus on configurator systems, even if one customer slows down, we won’t have a hard time dealing with over-inventory.

Nehal Choski, Analyst

Right. I think that later part is an excellent point. So maybe frame that up: of the incremental demand, how much of that is coming from configurations that your competitors typically would not fulfill? They have much more limited configurations they could provide.

Charles Liang, CEO

Yes. I’m very happy to share that most of our growth comes from our building block solutions. After we continue to emphasize our building block solutions, most customers are now seeing the value of our offerings because they support their urgent demands and also reduce their inventory risks for our sales and volumes.

Nehal Choski, Analyst

Okay, great. And then my final follow-up question is for Dave. SG&A, I think, was down $4 million in Q2. Is that correct? And why is that?

David Weigand, CFO

Yes, we had a little bit lower expenses. We had increased personnel costs, but lower bonuses in Q1.

Nehal Choski, Analyst

All right, got it. Thank you very much.

David Weigand, CFO

Okay.

Operator, Operator

We will pause for just a moment to compile the Q&A roster. At this time, there are no further questions. This concludes today’s event. Thank you for your participation. You may now disconnect. One moment.

Charles Liang, CEO

Thank you so much for joining us. I look forward to seeing you next quarter again. Thank you and have a good day.