Earnings Call Transcript - SMCI Q4 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Super Micro Fourth Quarter and Full-Year Fiscal 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator instructions were given. Thank you. I would now like to turn the conference over to Nicole Noutsios, Investor Relations. Please go ahead.

Nicole Noutsios, Investor Relations

Good afternoon and thank you for attending Super Micro's call to discuss financial results for the fourth quarter and full year fiscal 2021, which ended June 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 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 2020, and our other SEC filings. All of these documents are available on the IR section 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 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'll now turn the call over to Charles Liang, Founder, Chairman and CEO. Charles?

Charles Liang, Founder, Chairman and CEO

Thank you, Nicole, and good afternoon, everyone. I am pleased to announce that for the first time our quarterly revenue has exceeded $1 billion. For fiscal Q4 2021, we delivered year-over-year revenue growth of 19.3%. For the whole fiscal year 2021, our revenue grew 6.5%. We have gained market share and finally resumed fast growth starting from the March quarter this year, after the impact from the past 10-K delay and COVID-19 challenges. The revenue growth was driven by some wins from large enterprise customers and large multinational high-tech companies. These customers choose Super Micro because of our green computing technology, faster time-to-market, and plug-and-play total IT solutions, especially in appliance, cloud, AI and 5G markets. Now, let’s look at some key highlights from the quarter. Our fiscal fourth-quarter net sales totaled $1.07 billion, up 19.3%, both year-over-year and quarter-over-quarter, at the top end of our guidance range. This growth rate, I believe, is much higher than that of the industry. All our major geographies contributed double-digit year-over-year quarterly growth. Our fiscal fourth-quarter non-GAAP earnings per share was $0.81, up from $0.68 in the same period last year. We saw a significant increase in sales from new and existing large, high-profile customers. Our strong momentum is mainly driven by our business expansion from hardware solutions to total IT solutions that consist of hardware, software, and services. We have doubled our software engineering resources in the past 24 months to allow us to swiftly execute this plan. Through engagement and close collaboration with strategic leading hardware and software partners, we have provided our customers fully optimized, tested, certified, and ready-to-deploy reference architectures. As a result, large volume orders are deployed timely without customers having to go through complicated processes of hardware validation, software compatibility, and supply chain disruption. It’s a win-win for everyone. Earlier in fiscal Q4, we successfully executed the launch of Intel Ice Lake, AMD Milan, and NVIDIA A100 GPU-based product lines and began to ship more than 200 application-optimized product solutions. They are all based on the strong foundation of our Server Building Block Solution. These optimized systems are created in-house, leveraging close to three decades of subsystem innovations, including motherboards, enclosures, power supplies, and cooling technologies. What’s more, our security and management software empower customers to deploy, manage and scale in a timely manner from enterprises to hyperscalers. On the product side, our new Ice Lake-based X12 generation multi-node solutions have gained great traction among customers who are looking to scale out their enterprise and cloud data centers. From SuperBlade, MicroBlade to BigTwin, FatTwin and the upcoming GrandTwin, all these resource-saving product lines support dense NVMe and Optane persistent memory, flexible GPU and FPGA configurations, providing optimal performance and the best TCO to a variety of customer workloads. Our GPU product lines are continuing their strong growth with the explosion of AI/ML application demands. These new Ice Lake and Milan-based GPU product lines support larger on-GPU memory and accelerate compute intensive applications. Our 2U 2-node GPU system has proven to be a top-seller since its introduction, thanks to its optimal mix of CPU-to-GPU ratio and resource-saving features. Later this year, we’ll be introducing a brand-new Universal GPU product line that will provide even more flexible configurations for many different CPU and GPU module combinations, further push the limit of system density and performance up to 50% when compared to competition. Announced in June during Computex 2021, the Plug & Play Rack product line is an integral part of our complete solution strategy going forward. These turn-key racks have undergone a thorough, solution-level design and validation process and are built securely for our AI, 5G/Telco, enterprise, cloud, and storage customers. Upon receiving these total IT solutions, customers only need to connect power and networking, then they are immediately ready to run their applications, shortening the time from making decisions to seeing results. To further improve sales and operations efficiency, we will launch our auto-configurator tool to enable B2B/B2C automation, which will be broadly ready to service our customers in the coming few weeks. This tool makes it faster to achieve product optimization and more efficient to leverage configurations among our sales, engineers, and customers. We recently completed our Taiwan campus expansion. Now with the total 3 million square feet campus in Taiwan, we are equipped to deliver not only sufficient capacity and supply chain resilience, but also a lower cost structure. Combined with manufacturing facilities in Silicon Valley and the Netherlands, Super Micro is well positioned to grow market share with economies of scale, agility, quality and rapid delivery time. To satisfy our customers' fast-growing demands, we are working aggressively across our global supply chain to mitigate critical parts shortages. In summary, Super Micro has been solidly transforming into a total IT solution company from a server hardware company. In addition to providing the greenest hardware total solution, our software and service products are now ready for large enterprise, cloud, AI and Telco customers. Second, our Taiwan campus expansion doubles our solution capacity and lowers our cost structure. Now if we decide to do so, we can start to reduce our expenses at Silicon Valley HQ. Third, our business automation program, including the auto-configurator and B2B/B2C systems, will significantly improve customer experience by streamlining customer configuration and order processes, resulting in shortened solution delivery time with better quality and optimization. With that as a summary, I believe our fiscal year 2022 revenue will reach at least $4.3 billion and start to grow much faster than our past four years. In closing, I am pleased with the progress of our business transformation, which has started to speed up our business execution in fiscal '21. As a total IT solution company, we are now able to grow business much more efficiently and achieve our $10 billion revenue goal quicker; perhaps we are able to pull it in from 2026 to 2025 or even sooner. With that, I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional details on the quarter.

David Weigand, Chief Financial Officer

Thank you, Charles. We continued to accelerate in all major areas of the company and exceeded $1 billion in revenue for the quarter, which was at the high end of our guidance range. Growth was driven by wins from large enterprise customers and key high-tech companies worldwide, continued strength across all major geographies and solid demand for our products and services. Our fiscal fourth quarter revenue totaled $1.07 billion, reflecting a 19% increase both on a year-on-year and quarter-on-quarter basis. Looking at Super Micro's Q4 revenue in our three market verticals, we achieved $672 million in organic enterprise and channel AI and machine learning vertical, $366 million in OEM and large data center vertical, and $31 million in 5G/Telco and Edge/IoT vertical. Systems comprised 78% of total revenue and the volume of systems shipped was up year-over-year, while the nodes shipped were down year-over-year. System ASPs increased year-over-year and quarter-on-quarter. Performance was strong across all major geographies this quarter. On a year-on-year basis, Asia increased 25%, U.S. increased 21%, and Europe increased 13%, while Rest of World decreased 3%. On a sequential basis, U.S. sales increased 30%, Europe increased 14%, Asia decreased 1%, and Rest of World increased 7%. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q4 gross margin was 13.7%, down 30 basis points year-on-year and 10 basis points quarter-on-quarter. We expected our Q4 gross margin to improve 70 basis points due to discrete costs incurred in Q3. As expected, those costs did not repeat in Q4; however expedite fees and shipping costs increased by 50 basis points quarter-over-quarter. As reported by many other companies around the world, supply chain pressures related to the resurgence of variants of COVID-19 persist. Turning to operating expenses, Q4 OpEx on a GAAP basis was essentially flat quarter-on-quarter and decreased 7% year-on-year to $106 million. The decrease year-on-year was caused by a decrease in incentive bonuses, offset by higher headcount this year, primarily in R&D. On a non-GAAP basis, operating expenses increased 4% quarter-on-quarter and increased 9% year-on-year to $99 million. The quarter-on-quarter and year-on-year increases were related to headcount and other personnel costs as we continue to invest in human capital to address our growth opportunities. Other income and expense including interest expense was a $2.1 million loss as compared to a $1.4 million gain last quarter. The sequential change is mostly related to FX. This quarter our tax benefit was $1.6 million on a GAAP basis and an expense of $1.8 million on a non-GAAP basis. Our non-GAAP tax rate was 4% for the quarter. Lastly, our share of income from our JV was $0.6 million this quarter as compared to a loss of $0.3 million last quarter. Q4 non-GAAP diluted earnings per share totaled $0.81 as compared to $0.50 in Q3 of fiscal 2021 and $0.68 in the same quarter of last year. Cash flow from operations totaled $64 million compared to cash flow used in operations of $124 million in Q3. CapEx totaled $13 million resulting in free cash flow of $50 million. Key uses of cash during the quarter included increases to inventory and receivables while key providers of cash included an increase of $144 million in accounts payable and $12 million in deferred revenues. The increase in deferred revenue was due to higher sales of our service contracts. We also used $12 million to repurchase shares in the quarter. Our closing balance sheet cash position was $232 million, while bank debt was $98 million, resulting in a net cash balance of $134 million. Turning to the balance sheet and working capital metrics compared to last quarter, our Q4 cash conversion cycle was 80 days, which fell from 86 days in Q3, beating our target range of 85 to 90 days. While the absolute level of our inventory increased, days of inventory at 96 days decreased. Days Sales Outstanding was 37 days while Days Payables Outstanding totaled 53 days. Now turning to the outlook for our business. We expect net sales in a range of $900 million to $980 million, which resulted in GAAP diluted net income per share of $0.16 to $0.36 and non-GAAP diluted net income per share of $0.28 to $0.48 for the first quarter of fiscal year 2022 which ends September 30, 2021. We expect gross margins to remain at similar levels sequentially, with upside potential as we manage supply chain costs and maintain price discipline. Over the upcoming quarters, we 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 and B2C solutions. GAAP operating expenses are forecasted to be approximately $110 million and include $7 million in stock-based 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 total roughly $2 million and expect a nominal contribution from our JV. Non-GAAP operating expenses are forecasted to be up quarter-on-quarter from continued investment in R&D, lower NRE expected 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 53.7 million shares for GAAP and 55.0 million shares for non-GAAP. The outlook for Q1 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 taxes, that are excluded from non-GAAP diluted net income per common share. We expect net sales in a range of $4.1 billion to $4.5 billion, GAAP diluted net income per share of at least $2.60 and non-GAAP diluted net income per share of at least $3 for fiscal year 2022 which ends June 30, 2022. 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 55.3 million shares for GAAP and 56.5 million shares for non-GAAP. The outlook for fiscal year 2022 GAAP diluted net income per common share includes approximately $30 million in expected stock-based compensation and other expenses, net of taxes, that are excluded from non-GAAP diluted net income per common share. We expect CapEx for the fiscal first quarter of 2022 of approximately $14 to $16 million. Nicole, I’ll turn it back to you for Q&A.

Operator, Operator

Operator instructions were given. Your first question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Mehdi Hosseini, Analyst (SIG)

Yes, thanks for taking the question. I had a couple follow-ups. If I take the midpoint of the guide range for fiscal year 2022, it seems like there is a bit of leverage in operating profit — in other words maybe a 200 basis points improvement to get to $3 of earnings. What I want to understand is, what are the key assumptions for component costs — is this a base case or a very conservative case? And I have a follow-up to that.

Charles Liang, Founder, Chairman and CEO

I would say it’s based on a conservative base because the supply chain continues to be very tight. Although we have good relationships with our suppliers, the overall global environment is uncertain, so it’s conservative. Our operations have expanded to Taiwan, which helps improve the overall cost structure and supply resilience.

Mehdi Hosseini, Analyst (SIG)

Right, so where in the supply chain are you experiencing the most shortages? What are the key components that you are having the most difficulty procuring?

Charles Liang, Founder, Chairman and CEO

IC chips, especially IO chips.

Mehdi Hosseini, Analyst (SIG)

Okay. And a question on the cash flow: what was depreciation and amortization for the reported June quarter and what should we assume for fiscal year 2022?

Charles Liang, Founder, Chairman and CEO

I’ll get back to you on that, Mehdi.

Mehdi Hosseini, Analyst (SIG)

Okay. Given the CapEx growth in fiscal year 2021 — the $60 million and the build-up of the Taiwan facility — should we expect CapEx to moderate from here?

Charles Liang, Founder, Chairman and CEO

Absolutely. Yes, because our Taiwan operation is pretty much ready. We added about 200 staff in Taiwan last year and they have been well trained. They moved into the new building last month. Also, our B2B/B2C systems are coming online and will take orders. We will roll our services out to more customers in the next few weeks.

Mehdi Hosseini, Analyst (SIG)

Okay, great. So I’ll get back in queue?

Charles Liang, Founder, Chairman and CEO

Our investments have been made there.

Mehdi Hosseini, Analyst (SIG)

So Charles, are you implying that CapEx should decline in fiscal 2022?

Charles Liang, Founder, Chairman and CEO

Maybe. Because we expect to continue to grow in 2022, 2023 and 2024, operations expenses won't shrink; they may grow modestly because we already invested in Taiwan.

Operator, Operator

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

Nehal Chokshi, Analyst (Northland)

Yes, thank you and congratulations on strong results, especially the free cash flow. We were expecting a drain based on commentary for last quarter and were pleasantly surprised by the free cash flow. It looks like the big delta relative to our expectation was an increase in accounts payable, given this environment of strained component availability. How did you pull that off basically?

David Weigand, Chief Financial Officer

We did have a lot of inventory that came in near the end of the quarter, and that's what caused accounts payable to rise and resulted in the increase in days payable outstanding (DPO).

Nehal Chokshi, Analyst (Northland)

Okay.

Charles Liang, Founder, Chairman and CEO

We kept high inventory because we strongly believe customers needed those products.

Nehal Chokshi, Analyst (Northland)

I see. So because you built up inventory at the end of the quarter and you’re satisfied with demand heading into the September quarter, the balance sheet shows increased accounts payable. But what you're saying is that payable terms actually didn't increase; this is simply the timing of when you received the inventory?

Charles Liang, Founder, Chairman and CEO

That's exactly right.

Nehal Chokshi, Analyst (Northland)

Got it. And I don't recall the last time you gave full-year guidance — I’m not sure if you have before; you certainly didn’t during fiscal 2021 or fiscal 2020 when the 10-K filing delay held things up. What has changed to give you the visibility to guide on a full-year basis, and importantly, the midpoint is almost 10% above consensus?

Charles Liang, Founder, Chairman and CEO

Not much changed in terms of our fundamentals, but we have a successful expansion in Taiwan, we've built business automation including the auto-configurator for B2B and B2C, and we are expanding from a hardware solutions company to a total IT solutions company. We have a more complete picture of our market and the sales pipeline for the whole year, which gives us the confidence to provide full-year guidance.

Nehal Chokshi, Analyst (Northland)

Okay. This midpoint 20% growth guidance for fiscal year 2022 — is this tied to any sort of server industry growth expectation or is it independent of industry growth?

Charles Liang, Founder, Chairman and CEO

Not quite tied directly to industry growth. Historically, before 2017 we grew two to four times faster than the industry. We believe we have returned to faster growth starting in March and June last quarter, and we expect to outperform the industry going forward. We believe the industry may grow 5% to 10% and our growth should be double that.

Nehal Chokshi, Analyst (Northland)

Okay, great. My final question: the minimum $3 per share — does that correspond to the low end of the revenue guidance or the midpoint of revenue guidance?

Charles Liang, Founder, Chairman and CEO

I would say it's a conservative number.

Operator, Operator

Your next question comes from the line of Ananda Baruah with Loop Capital. Your line is open.

Ananda Baruah, Analyst (Loop Capital)

Good afternoon, guys. Thanks for taking the question and congratulations on the strong revenue execution and the visibility to put out a full-year guide. David, could you just walk back through the components you spoke to on gross margin? I just want to make sure I'm straight on those. Then I have a quick follow-up as well.

David Weigand, Chief Financial Officer

Certainly. When we finished last quarter at 13.8%, we had about 70 basis points of discrete costs in Q3, which included some one-time costs. Those did not recur in Q4. However, we incurred about 50 basis points of increased shipping costs as a directed effort to deliver product to customers on time. That was the primary reason we were not able to raise margin as much as we had expected. In addition, there was impact from deferred revenue allocation related to service contracts, and product mix effects.

Ananda Baruah, Analyst (Loop Capital)

That’s helpful. So roughly, you lost the 70 basis points that had been a one-time drag, then you had 50 basis points of shipping headwind. Was there an incremental 30 basis point headwind that brought it down to the 13.7% number?

David Weigand, Chief Financial Officer

We did have the deferred revenue carve-out for service contracts of about $12 million that affected margins, and the rest was product mix and the shipping costs.

Ananda Baruah, Analyst (Loop Capital)

Got it. You mentioned you expect in the coming quarters to move up into the 14% to 17% range. What are the pushes and pulls there, and can you give any order-of-magnitude for those factors?

David Weigand, Chief Financial Officer

With the Delta variant, it's hard to say COVID is over, so supply chain and shipping costs may continue to be a factor. However, initiatives such as our transition to Taiwan, new product offerings that have higher margins, and the B2B/B2C configurator should drive margin improvement. Taiwan is online now, but it will take a couple of quarters to fully realize the benefits.

Ananda Baruah, Analyst (Loop Capital)

Any chance you can give a sense of what gross margin for fiscal 2022 could look like?

Charles Liang, Founder, Chairman and CEO

We've given guidance on the top line and bottom line, and other than that we expect gross margins to improve, but we're not giving further granularity. Our target is to be back within our historical range of 14% to 17% during the year.

Ananda Baruah, Analyst (Loop Capital)

Appreciate it. I'll get back in the queue.

Operator, Operator

Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers, Analyst (Wells Fargo)

Thanks for taking the questions and congrats on the quarter. As the industry deals with supply chain shortages — semiconductors, IC shortages, etc. — have you been able to get customers to accept extended lead times and has that provided you with better visibility? And related, does the guidance for this current quarter assume you were able to get the supply to meet demand? Put another way, are you able to meet demand as you see it in the current quarter?

Charles Liang, Founder, Chairman and CEO

Very good question. Although we've worked as much as possible with customers, we cannot always get everything we want. We can shift some demand with customers, and many customers have been cooperative and accepting longer lead times because they understand the global difficulty. We have not been able to shift all demand, but customers are generally cooperative and satisfied with our service.

Aaron Rakers, Analyst (Wells Fargo)

What is your current view on when this normalizes? Does your fiscal 2022 guidance reflect a view that the tightness in the semiconductor supply chain starts to normalize through this fiscal year, or do you think it is further out?

Charles Liang, Founder, Chairman and CEO

Traditionally, our growth story was two to four times faster than the industry, and I believe we are back to that momentum. The global shortage impacted growth somewhat, which is why we are being conservative with the $4.3 billion baseline, but I believe growth will be much better than that as we move forward.

Aaron Rakers, Analyst (Wells Fargo)

One quick question: there are many architectural changes happening in servers and semiconductors. What kind of growth are you seeing in GPU-accelerated server platforms? Do you think richer server configurations can drive a positive upward trend in blended ASPs for the foreseeable future? How are compute architectures evolving in a way that benefits Super Micro?

Charles Liang, Founder, Chairman and CEO

As a technology company based in Silicon Valley, we embrace technical challenges and new technologies. The variety of different CPUs, GPUs and platforms is not a problem for us. We will introduce the GrandTwin architecture very soon and a Universal GPU platform by the end of this year. These will provide much more flexible support for multiple CPU vendors, GPU vendors, and form factors. Our Server Building Block approach allows us to optimize architectures such as GrandTwin and the Universal GPU solution, and we are excited about the opportunity.

Operator, Operator

Your next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Jon Tanwanteng, Analyst (CJS Securities)

Good afternoon, guys, and great quarter and outlook. I wanted to drill down on how you have confidence in that $4.3 billion revenue number. Is that a bottoms-up analysis with qualified customer leads and indications of interest or contracts already signed, or is that something you actually have to go out and get? How do you build to that?

Charles Liang, Founder, Chairman and CEO

It’s both bottoms-up and top-down. We see growth coming from our improved operation, better products, and many new engaged high-profile customers we have achieved in the last six months. We feel optimistic about achieving that number.

Jon Tanwanteng, Analyst (CJS Securities)

How do you feel about your ability to pass through higher input and shipping costs to customers? Are you running surcharges or other pricing mechanisms, and are customers receptive?

Charles Liang, Founder, Chairman and CEO

It's a complex situation. We try to communicate with customers and, where possible, pass through costs. Overall, we have had to absorb a significant portion — I would estimate at least 50% — of those additional costs, while customers have been cooperative. We aim to be fair and pragmatic so we can continue to grow.

Jon Tanwanteng, Analyst (CJS Securities)

When do you think you can catch up on pricing to reflect higher input costs? Is it a quarter or two? How should we think about the lag time before you can fully pass through these costs?

Charles Liang, Founder, Chairman and CEO

It’s complicated because of the pandemic and ongoing airfreight constraints. Once COVID-19 recedes, I believe things will recover to normal. In the meantime we can increasingly pass through costs, but it's been roughly a 50-50 split in the last quarter. We expect to get better, but the timing depends on the pandemic easing.

Operator, Operator

Your next question comes from the line of Jon Lopez with Vertical Group. Your line is open.

Jon Lopez, Analyst (Vertical Group)

Sorry about the phone trouble. Thanks, David. I wanted to come back to the fiscal Q1 guidance. You referenced not declining in fiscal Q1, but the guidance is a bit below normal seasonal trending after being comfortably above that pattern in the last two quarters. How should we interpret that? And is there any constraint on your revenue guidance relative to component or logistical issues that you can quantify?

David Weigand, Chief Financial Officer

Our guidance range is intended to allow for the supply-chain struggles we face. We provided a broad enough range that we can overachieve, but we also feel comfortable that the range accounts for supply constraints.

Charles Liang, Founder, Chairman and CEO

Another factor is that this year we made larger salary adjustments for employees because last year we held salaries steady due to COVID-19. You may see some impact in Q1 and Q2 from that. Also, our Taiwan expansion required hiring and training people, but they are now ready to contribute to revenue and profitability.

Jon Lopez, Analyst (Vertical Group)

Okay, thanks. On gross margin and the $3 figure — to achieve that, gross margin needs to be close to 15% later in the year. Do you have line of sight to the logistical issues abating by calendar Q3? If not, are you committing to $3 through other levers like OpEx reductions, or can you walk through how you have comfort in that number?

David Weigand, Chief Financial Officer

Things that help our cost structure include the movement of production to Taiwan, which we expect to benefit margins, and our new product offerings that carry higher margins than traditional servers. Those are the factors that give us confidence that even with supply chain challenges and higher shipping costs, through price management and operational improvements we can deliver on our targets.

Charles Liang, Founder, Chairman and CEO

To answer more directly: we expect significant growth in fiscal 2022 and 2023. If that growth did not materialize, we have options, including reducing some resources in the U.S. headquarters — though we hope we don't need to do that. We would execute cost reductions as necessary, but our preference is to continue to scale and grow.

Operator, Operator

We have a follow-up question from Mehdi Hosseini with SIG. Your line is open.

Mehdi Hosseini, Analyst (SIG)

Thank you. Quick follow-up: what's your view on current memory prices? How do you see the trend over the next one or two quarters in terms of availability and pricing?

Charles Liang, Founder, Chairman and CEO

That's a complicated question. At this moment, availability is better than last quarter, so price trends should be better than before. As to when prices will stop rising or start falling, we are watching carefully. There is no clear date, but conditions feel better versus last quarter.

Mehdi Hosseini, Analyst (SIG)

Thanks for the color. As you think about your FY '22 revenue guide, how should we think about incremental opportunities? A lot of AI projects that hyperscalers are expected to ramp — does FY '22 capture some of them, or should we wait for FY '23 for a more meaningful contribution?

Charles Liang, Founder, Chairman and CEO

For AI, we expect to continue to grow very well in fiscal 2021 and 2022; maybe more than 50%, I hope. Telco is another area where we grew well last year and should grow even more in 2022. Regarding hyperscalers, with our Taiwan operation now ready, we have the ability to service hyperscaler customers if we choose to. We will be selective and pursue customers where we can provide value.

Mehdi Hosseini, Analyst (SIG)

When you talked about AI, does that include ARM-based solutions such as the Apple A6-class CPUs, or do you lump ARM into the hyperscaler segment?

Charles Liang, Founder, Chairman and CEO

That's a forward-looking question. We do have some ARM designs as well. A few customers already prefer ARM-based submissions and we have some submissions under our belt.

Mehdi Hosseini, Analyst (SIG)

Okay, so when you reference AI it isn't necessarily ARM-based solutions; it's more general, right?

Charles Liang, Founder, Chairman and CEO

Many AI solutions still are based on NVIDIA GPUs, but when customers need ARM-based solutions, we will be ready.

Operator, Operator

And for the last question we have a follow-up from Ananda Baruah with Loop Capital. Your line is open.

Ananda Baruah, Analyst (Loop Capital)

Thanks for the follow-up. Any context you can give on revenue seasonality during fiscal year 2022? Will there be a seasonal pattern or will it be different than usual — fairly ratable on a year-over-year basis?

Charles Liang, Founder, Chairman and CEO

September is always a seasonally strong quarter, and this year is no exception. Because of global shortages we tried to be conservative when we shared the number for the September quarter. But generally, you can expect our usual seasonality where December and June are also typically strong quarters.

Operator, Operator

Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect.