Super Micro Computer Inc (SMCI) Q1 2024 Earnings Call Transcript

Super Micro Computer Inc (NASDAQ: SMCI) Q1 2024 Earnings Call dated Nov. 05, 2024

Corporate Participants:

Michael Staiger — Senior Vice President, Corporate Development

Charles Liang — Founder, President, Chief Executive Officer & Chairman

David Weigand — Senior Vice President, Chief Financial Officer & Chief Compliance Officer

Analysts:

Michael Ng — Analyst

Samik Chatterjee — Analyst

Aaron Rakers — Analyst

Ananda Baruah — Analyst

George Wang — Analyst

Nehal Chokshi — Analyst

Vijay Rakesh — Analyst

Jon Tanwanteng — Analyst

Mehdi Hosseini — Analyst

Quinn Bolton — Analyst

Presentation:

Operator

Thank you for standing by. My name is Tamia and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. SMCI US Q1 FY ’25 Business Update Call.

With us today are Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Senior Vice President of Corporate Development.

[Operator Instructions] Thank you.

Michael Staiger — Senior Vice President, Corporate Development

Good afternoon, and thank you for attending Supermicro’s First Quarter Fiscal 2025 Business Update Conference Call for the first quarter, which ended September 30, 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. I will make additional remarks prior to beginning of the Q&A, but the company will not address any questions regarding the recent decision of our independent auditor to resign in the delay in the filing of the company’s 10-K.

During today’s conference call, Supermicro will address business and market trends from the first quarter of fiscal ’25, including our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry and economic trends. We will discuss estimated financial results, but reference to any financial results are preliminary and subject to change based on finalized results contained in future filings with the SEC. By now, you should’ve received a copy of today’s news release that was issued after the close of market and is posted on our website where this call is being simultaneously webcast.

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 as 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. This call is being broadcast live on Supermicro Investor Relations website and being recorded for playback purposes. An archive of the webcast will be available on the IR website and its property, Supermicro. Our second quarter fiscal 2025 quiet period begins at the close of business, Friday, December 13, 2024.

With that I will turn it over to Charles.

Charles Liang — Founder, President, Chief Executive Officer & Chairman

Thank you, Michael.

Before we dive into our fourth quarter details, I would like to share some thoughts on the recent challenges that the company has experienced. As we have emphasized in our filings since these challenges emerges, we remain confident in our previous financial reports. And as previously announced, we are actively in the process of engaging a new auditor. We are working with urgency to become current again with our financial reporting.

I’m pleased to report that the Special Committee had today provided the following statement to Supermicro which is also included in our press release. I quote. The Special Committee has completed its investigation based on a set of initial concerns raised by Ernst & Young. Following a three-month investigation led by Independent Counsel, the Committee’s investigation to date has found that the Audit Committee has acted independently and that there is no evidence of fraud or misconduct on the part of management or the Board of Directors.

The Committee is recommending a series of remedial measures for the company to strengthen its internal governance and oversight functions, and the Committee expects to deliver the full report on the completed work this week or next. The Special Committee has other work that is ongoing but expects it to be completed soon. End of quote. The Special Committee has not otherwise provided any additional details for innovation. We look forward to receiving the Committee’s floor report in the near future. We do not believe the current challenges affect Supermicro’s ability to service our customers and partners as we continue to grow rapidly and strongly with the AI revolution. And my confidence in Supermicro and its staff remains stronger than ever.

Here are some key quarterly highlights. The preliminary fiscal Q1 net revenue was in the range of $5.9 billion to $6 billion at midpoint this is up 181% year on year driven by strong AI demand from our old and new customers. It was one of our strongest first quarters in history despite the many customers are waiting for the coming soon new generation GPU chips. The preliminary fiscal Q1 non-GAAP earning in the range of $0.75 to $0.76 per share was 30% last year, approximately 122% year-on-year growth rate. The preliminary non-GAAP gross margin approximately 13.3% and non-GAAP operating margin is approximately 9.9%. Both were higher than the previous quarter as customer mix improved and supply chain cost and expedited shipping it for DLC components.

We have deployed our world’s largest DLC AI SuperCluster with 1,000 — with 100,000 NVIDIA GPU in record time — in the record time to deployment, TTD as well as time to online. This milestone achievement reflects our engineering expertise and complex logistics capabilities for large-scale AI infrastructure deployment. Leveraging our Data Center Building Block Solution, DCBBS, we are now building full-scale liquid-cooled data center with our Rack-scale Plug and Play solutions featuring our latest DLC liquid cooling technology at a leading pace. DCBBS, Data Center Building Block Solution, can reduce the time required for customers to build new data centers from roughly two years to a few quarters, significantly improving data center TTP, TTO, time to delivery and time to online and cost for customers’ AI IT infrastructure.

Data Center Building Block Solution is also helping to accelerate the adoption of DLC liquid cooling, driving efficiency and performance while reducing customers opex achieving Green Computing. We expect 15% to 30% of new data centers will adopt liquid-cooled infrastructure in the next 12 months. The DLC volume is at least 10 times more than last year. I mean, this year DLC market share will be at least 10 times more than last year due to the DLC liquid cooling product maturity and the rapid growth of AI. To keep the DLC solutions performing at their best, our new SuperCloud Composer, SCC, is capable of end-to-end management from chip level all the way to rack level and data center cooling towers, making it the most powerful DLC data center management software on the market today. SCC further simplified provisioning of a highly automated software-defined infrastructure, supporting customers with rapidly changing workload requirements.

With the addition of SCC, Supermicro is well prepared to service many more customers and grow DLC liquid cooling data center market share. On the production front, we are in the process of completing our new Malaysia campus where we expect to begin manufacturing later this quarter. Additionally, we have been non-stop expanding our facilities in Silicon Valley to increase our DLC liquid-cooling rack-scale production capacity. Now they are boasting 50-megawatt of power and able to produce more than 1,500 DLC GPU racks per month. With plans to scale up further, our Taiwan and Europe production facilities also are growing at a quick pace. Moreover, we are planning to expand to several other global manufacturing locations in the near future.

By leveraging our strengths in technology, innovation, product design, builder quality, supply chain management, deployment and data center services, we are pushing our goal to transform Supermicro into a leading USA as well as worldwide AI IT infrastructure company. We are off to a strong start in fiscal 2025. Our total IT solutions deployments are rapidly scaling and our new product developments are progressing smoothly. Our NVIDIA GB200 NVL72 is ready and the 10U air-cooled and 4U liquid-cooled B200 rack part and play systems are fully production-ready.

The brand new 200 kilowatts plus SuperRack architecture co-developed with NVIDIA which provides near 100% DLC. I mean, the whole rack almost no cooling fan required. It also on the right track. The new SuperRack architecture will be able to achieve power usage effectiveness, PUE close to 1.0 to complete our broadest AI portfolio. Now AMD, MH300, MH322 — sorry, MH325 platforms and Intel Galv 3 solutions are ready to go as well. Our data center building block solution is attracting more new customers and our long-term investment in DLC liquid cooling is paying off with world-class quality and volume capacity, giving us a sustainable competitive edge and economics of scale.

Before passing the call to David Weigand, our CFO, I want to thank our partners, customers, investors and Supermicro employees and express my appreciation for their patience and support until we can provide more information about our 10-K filing status. Our strong foundation, Data Center Building Block Solution and DLC liquid cooling, Green Computing leadership not only reduce energy cost for our customers but also contributed to a healthier margins. I believe we are well-positioned for strong future growth.

David Weigand — Senior Vice President, Chief Financial Officer & Chief Compliance Officer

Thank you, Charles.

We remind investors that the unaudited interim financial information in this report is preliminary. We expect unaudited Q1 fiscal year ’25 revenues in the range of $5.9 billion to $6 billion, up 181% year-over-year and up 12% quarter-over-quarter versus our guidance of $6 billion to $7 billion. Growth was driven by strong demand for direct liquid-cooled rack-scale AI GPU platforms. AI contributed over 70% of revenues across enterprise and cloud service provider markets. The expected Q1 non-GAAP gross margin is approximately 13.3% versus 11.3% last quarter due to product and customer mix and lower costs, coupled with higher manufacturing efficiencies on DLC AI GPU clusters. The Q1 non-GAAP operating margin is approximately 9.9%, excluding $67 million in stock-based compensation expenses versus 7.8% in Q4.

The Q1 estimate for other income and expense is expected to be a net expense of approximately $9 million, consisting of $17 million in interest expense, offset by $8 million in interest and other income. The Q1 tax rate is approximately 14% for GAAP and 16% for non-GAAP. The Q1 estimate for GAAP net income is $433 million to $443 million and non-GAAP net income is $483 million to $493 million. Non-GAAP net income excludes $50 million in stock-based compensation expenses, net of the related tax effects of $17 million. The split-adjusted Q1 GAAP diluted earnings per share range is approximately $0.68 to $0.70 versus prior guidance of $0.60 to $0.77.

The Q1 non-GAAP diluted EPS range is approximately $0.75 to $0.76 versus guidance of $0.67 to $0.83. We expect a Q1 GAAP diluted share count of $639 million and a non-GAAP diluted share count of $648 million. Operating cash flow is approximately $407 million, an improvement of $1 billion quarter-over-quarter. Q1 closing inventory was approximately $5 billion. Capex for Q1 was $42 million. Positive free cash flow was $365 million for the quarter. The Q1 closing balance sheet cash position was $2.1 billion and total debt was $2.3 billion, with bank debt of $0.6 billion and convertible bond debt of $1.7 billion, resulting in an improved Q1 net cash position of approximately negative $0.2 billion versus a net cash position of negative $0.5 billion last quarter.

Turning to the balance sheet and working capital metrics, compared to last quarter, the Q1 cash conversion cycle was 97 days versus 94 days in Q4. Days of inventory was 85 days compared to the prior quarter of 82 days. Days sales outstanding for Q1 was 41 days versus 37 days last quarter, while days payables outstanding was 29 days from 25 days last quarter. For the second quarter of fiscal 2025, we expect sales — net sales in the range of $5.5 billion to $6.1 billion. We expect GAAP and non-GAAP gross margin down 100 basis points sequentially due to customer and product mix. We expect GAAP and non-GAAP operating expenses up approximately $34 million sequentially and GAAP and non-GAAP other income and expense to be a net expense of approximately $7 million. We expect GAAP net income per diluted share of $0.48 to $0.58 and non-GAAP net income per diluted share of $0.56 to $0.65.

The company’s projections for GAAP and non-GAAP net income per diluted share assume a tax rate of 14% and 15%, respectively. A diluted share count of $640 million shares for GAAP and a diluted share count of 648 million shares for non-GAAP. The outlook for Q2 of fiscal year 2025 GAAP net income per diluted share includes approximately $54 million in expected stock-based compensation expense and other expenses, net of related tax effects of $14 million, which are excluded from non-GAAP net income per diluted share. The final financial results reported for this period may differ from the results reported here based on the review by the new independent registered public accounting firm to be appointed. We are working diligently to select a new independent registered public accounting firm and complete our fiscal year ’24 audit.

Michael, we’re ready.

Michael Staiger — Senior Vice President, Corporate Development

Thank you, David.

Hey, before we get into questions, we appreciate you may have further questions about the special committee’s findings as well as our audit timeline. We’re not in a position to address those questions on the call today.

So with that, operator, we’ll take first question.

Questions and Answers:

Operator

[Operator Instructions] The first comes from Michael Ng with Goldman Sachs. You may proceed.

Michael Ng

Hey, good afternoon. Thank you for the question. Just on the business fundamentals, revenue came in at the lower end of the guidance. I was wondering if you could speak to that and whether you’re seeing any market share losses as a result of some of the delayed financial filings. And how do you feel about the $26 billion to $30 billion full-year revenue guidance that you previously gave out? And are you hearing from any customers that once this resolution occurs, they’ll be able to step up some of their orders or is it a gating factor? Thank you.

Charles Liang

Okay. Thank you for the question, Michael. Indeed, last quarter, revenue reduced a little bit. I guess the major reason because there are some customers waiting for the new chip, the Blackwell chip as you know. So people are waiting for a new solution and the new solution — I mean the Blackwell based liquid cooling, air cooler or GP200, our solution is ready, that’s waiting for a chip. So I guess that’s a major reason. And we — our capacity continues grow and our liquid cooling solution is fully ready again. Again, we can produce 1,500 deep core rack for months now. So we are fully ready. That’s waiting for the new chip to be available. And then I believe we can grow our market share and revenue after that.

Michael Ng

Great. And for David, just on the full-year guidance.

David Weigand

Yeah. Michael, we’re not providing annual guidance on this call.

Michael Ng

Okay, great. Thank you, Charles. Thank you, David.

Charles Liang

Thank you, Michael.

Operator

Thank you. The next question comes from Samik Chatterjee with JPMorgan. You may proceed.

Samik Chatterjee

Hey guys, thanks for taking my question. I guess maybe to sort of talk about the gross margins here. You had robust gross margins in the quarter, but you’re guiding it down. It seems like maybe it’s a bit more choppy in terms of gross margins depending on customer mix. Does the progression getting back to the 14% to 17% that you talked about earlier still remain sort of the base case? Or are you having to sort of discount more or be more aggressive on pricing on the current generation products? And as a separate sort of a side question, just I know you’re not commenting on relative to the filings, but any management changes or any changes in how you operate that you’re planning or thinking about to sort of overall improve things in terms of getting more sort of more disciplined around and more control around the financial reporting? Thank you.

Charles Liang

Thank you, Samik. Yes, I mean, depends on new product, right, when new GPU chip available. As you know, whenever there are new generation of our technology, we have an advantage to grow our market share and profitability. At the same time, our data center Building Block Solution with SECC, Silver Micro cloud composer that provides a full end-to-end solution that for sure we have gradually grow our gross margin and the net margin. As to management team, yes, we always faster growing. 2023 we grew 40% above and then 2024 we grew more than double. And this year again we will have a big growth. So when company are fast growing, we continue to add more people including senior management. So we are evaluating the possibility including the Special Committee. And we by the nature, we continue to grow senior management team as well.

Samik Chatterjee

Thank you. Thanks for taking the questions.

Charles Liang

Thank you.

Operator

Thank you. The next question comes from Aaron Rakers with Wells Fargo. You may proceed.

Aaron Rakers

Yeah. Thanks for taking the questions. A couple if I can as well. I just — Charles, I want to go back. I think when you guys had originally guided this quarter, I think the guidance range is like $6 billion to $7 billion. You came in at about $500 million at the midpoint short of that, I guess given the comments to the prior questions, are you assigning that to just the timing of Blackwell? Or was there something that changed the demand or the timing of deployments this last quarter? I’d also add-in there. I think last quarter, when you had set that guide, I think there was like $800 million of sales that you had alluded to as being pushed out of last quarter into this fiscal first quarter. Did that all close? I’m just try to bridge that gap for me between the delta and the guide relative to the business update today?

Charles Liang

Okay, good. Aaron. Thank you. I mean this is a complicated question. So I believe that major impact is new chip availability, because Blackwell chip for sure is much higher performance, much better performance per dollars, right. And the good thing is that, looks like it will be available gradually. And Q1 — hopefully Q1 2025, hopefully volume become much better. And so that’s the major factor I believe. As to our 10-K today may impact a little bit how much I don’t know yet, but certain impact for sure. But hopefully not too big. As through the whole year, yes, today we do not provide annual guidance. But basically with our difficulty in leading edge, right, in last few months, we delivered more than 2,000 rack DLC. That I believe is a very high percentage for the whole digital market. So for our future growth, I personally still very optimistic.

Aaron Rakers

Yeah. Okay. And then two other quick questions, if I can. So first of all, I mean, you mentioned $5 billion of inventory coming out of this quarter. Any thoughts of where that might trend coming out of this next quarter embedded in your outlook that you provided today? And then I apologize for asking, I know that you didn’t — you’re not going to address the Special Committee dynamics, but any thoughts on the timing of an auditor, of getting an auditor to sign, anything you can share on that front? I appreciate that, yes, we’re not talking much about that, but curious any comments on that front?

Charles Liang

Okay. For inventory, maybe I can answer a little bit. I mean, the company will continue to grow, I believe. So $5 billion stable inventory IPD will continue. And as to the Special Committee investigation result today, I’m very happy to share some very positive information as to detail, once it’s available from them, we will share with the market.

David Weigand

And Aaron, we have no update with respect to the audit timeline that we could talk about as we mentioned earlier.

Aaron Rakers

So just getting into — thank you.

David Weigand

But we’re working diligently to get that done, as I mentioned as quickly as possible.

Aaron Rakers

Yeah. Thanks, guys.

Operator

Thank you. [Operator Instructions] The following comes from Ananda Baruah with Loop Capital. You may proceed.

Ananda Baruah

Yeah. Guys, yeah, good afternoon, good evening. Thanks for taking the questions. Two if I could. I guess the first is on gross margin, sort of — should we expect — well, I guess really the question is, Dave, should we still expect it to improve as we go through the fiscal year as you were previously anticipating.

David Weigand

Yeah. So by the way, we guided cautiously in this first quarter on our margin, so we were glad to be able to exceed it. And so in like fashion we’re guiding conservatively into the second quarter. And so it’s still — we still have our target margin that we’re shooting for and so we’re doing everything that we can to improve that.

Charles Liang

Yeah. The competition was sure putting some pressure as you know, but Blackwell, I mean a new technology, I personally feel very optimistic, with Supermicro is a chance to grow. And as I mentioned, the Data Center Building Block Solution including SCC, SuperCloud Composer that provide end-to-end management from chip level to rack scale to the whole data center [Indecipherable]. So I believe all of those will help our growth. And then we also start to provide — able to provide a customer on-site deployment, on-site cable and service. So all of those are very positive to our business. So I feel very positive to continue to grow the business, I mean.

Ananda Baruah

Yeah. Thanks for the margin context. Appreciate that. And the follow-up is just, I guess, just a general working capital financing question. This question comes up — hasn’t come up in a lot with investors. And could you just give us — really the question is can you explain sort of the access to capital situation as we go-forward? And I guess really, how would you being — like the investment community to think about the access to capital situation. Thanks.

David Weigand

Sure. So Ananda, we put in — we put in the last eight months, nine months, $4 billion into working capital from two equity raises and one convert. And so that’s really — it really left us with a — in a good working capital situation, exiting Q4 at a run rate of around $1 billion — of $6 billion. So again, we’re forecasting a little bit — a little down in Q2. So that takes care of our working capital needs for a while. So access, we have a very strong growing and profitable company. And so we don’t believe that we’ll have any impediments to raising working capital.

Charles Liang

Yeah. Quarterly — every quarter, we are making a reasonable good net profit though. So basically, we should be in good shape.

Ananda Baruah

Okay, guys. Thanks so much. That’s helpful. Thank you.

Operator

Thank you. The next question comes from George Wang with Barclays. You may proceed.

George Wang

Okay, guys. Thanks for taking my question. I have two quick ones. Firstly, can you kind of double-click on which quarter do you think that you will start booking the Blackwell revenue? Last time you guys alluded to sometime in the June quarter, just curious whether this is still on track. Just any kind of high level in terms of when do you think that the Blackwell is going to show up in the P&L?

Charles Liang

Yeah. Very big question. Indeed, we are asking NVIDIA every day. So I hope their production can go smooth and go for high-volume very soon. And once they have a cheap available, our solution are fully ready. So we continue to work with them very closely to develop current product GB200, NVL72 and GB200 liquid cool and air cool. And we also designed some really enhanced rack-scale solution. So in terms of total solution, we have a very strong offering waiting for that chip. So we need NVIDIA as a quickest approval. Thank you.

George Wang

Got it. That’s helpful. Just a quick one, if I can. Just how to think about gross margin in the era of Blackwell versus Hopper. Just curious if you can talk about puts and takes on the gross margin for the GB200, especially in light of reference design from NVIDIA. Any kind of incremental value-add from Supermicro just as we kind of head to the Blackwell, just in relation to the profit — profitability and the kind of margin profile? Thank you.

Charles Liang

Yeah. Thank you. But like the way, for sure, we estimate more competitor, right, because people know AI market is still bigger now. So with the Blackwell we expect more competition. But at the same time, we also were prepared by our data center building block solution with our end-to-end SuperCloud Composer and with our on-site deployment cabling service business. So those are new and I believe we are able to provide a very unique, very efficient time to delivery time to online advantage to customer. So yes, competition is strong, but I believe we are in good position.

George Wang

Okay. Thanks a lot, Charles. I will go back to the queue.

Charles Liang

Thank you.

Operator

Thank you. The following comes from Nehal Chokshi with Northland. You may proceed.

Nehal Chokshi

Yes, thank you. Thank you for taking my questions. A couple of questions, please. First, Dave, any 10% customer exposures in the quarter and the upcoming quarter?

David Weigand

Indeed, we will have 10% customers now.

Nehal Chokshi

Okay. Could you give us some detail as far as what percent of overall revenue do the 10% customers represent in the September quarter?

David Weigand

Yeah. So we’re not going to release that data today.

Charles Liang

Yeah. But at the same time, we continue to gain more new customers, especially in Europe and Asia. So I believe we will be able to keep a healthy ratio.

Nehal Chokshi

Okay, great. And then Charles, I think there’s a strong feeling in the investment community that the Chairman and CEO roles, if separated could be quite beneficial to Supermicro. From your perspective, what is the benefit of Supermicro separating these roles?

Charles Liang

Okay, well, I would have based over a company, that’s my consideration. So every day, if not every week and then every week, I have been thinking about a question since many years ago. And so again, what were the base of business. So I personally very open mind and I’m a technology guy and technology is my best interest. But still, overall consideration is the best benefit for shareholders and the company.

Nehal Chokshi

And just to be clear, do you see the potential being in the best interest of the shareholder of that of separating these roles there?

Charles Liang

No comments at this movement, but I’m seriously considered about it. And someday I will retire for sure. Hopefully not in one year, two year, but don’t know when I will retire. So I mean those are changing for sure is a natural and whatever the best of a shareholder and for our company and for my family too.

Nehal Chokshi

Thank you for taking my question.

Charles Liang

Thank you.

Operator

Thank you. The next question comes from Vijay Rakesh with Mizuho. You may proceed.

Vijay Rakesh

Hi Charles, so on the September quarter and December quarter, I’m just wondering how many liquid cooled racks you’re shipping in September and Give your some idea in December?

Charles Liang

David, do you have some number this year?

David Weigand

It was just a little below last quarter, but I don’t have the exact. I would have to say, we are a company ship most of our liquid cooling rack to the market recently. For example, in the September quarter. And our liquid cooling because ahead of the market. So — and customer like our liquid cooling because the save their energy power and safe water requirement and kind of a — it’s a trend. So I believe we will continue to grow liquid cooling percentage.

Vijay Rakesh

Got it. And when you say down sequentially into December quarter on the H200 liquid cooling, any idea on how much that is sequentially?

Charles Liang

We did not share that number, but I believe liquid cooling will continue to grow very quickly. And we are very happy to promote that.

Vijay Rakesh

Got it. And — yeah, go ahead.

David Weigand

Go ahead, Vijay.

Vijay Rakesh

Sorry. I think, David, on the November 16 deadline, are you guys comfortable that you will have an auditor and file a plan to the NASDAQ?

David Weigand

So we’re not answering those questions today.

Vijay Rakesh

Got it.

David Weigand

So we’re — yeah. We’re like I said, we’re diligently looking to replace the auditor as quickly as possible and we will be filing a plan with NASDAQ and indeed regarding an extension. And so — but that’s all we have to say about that.

Vijay Rakesh

Got it. Thank you.

Operator

Thank you. The next question comes from Jon Tanwanteng with CJS Securities. You may proceed.

Jon Tanwanteng

Hi, good afternoon, and thank you for taking my questions. I was wondering, Charles or David, could you break out what your expected revenue in Blackwell was supposed to be in the Q1 guidance and what you’re — what you have implied in the Q2 guidance, first of all? And then second, do you see a risk of supply or allocations due to this auditor and filing issue, especially from NVIDIA, just would they possibly, maybe hold back some just until you figure it out or are they supporting you through this in just meeting your orders and especially with the new technology? Thank you.

Charles Liang

Yeah. Our relationship with NVIDIA have been multiple decades and our growth kind of cooperating between two companies continue to be — continue to enhance. So we have many important project co-develop and I don’t expect and then negative allocation from them. So at this moment, according to our relationship, according to our communication, things are very positive.

Jon Tanwanteng

Great. And then the — I guess the Blackwell numbers that were implied in the last quarter’s and this quarter’s guidance?

Charles Liang

That’s hard to answer because we don’t know how — what’s the volume NVIDIA we have a Blackwell available every month. So we work with them very closely and co-develop the solution, validate the solution and service the common customer. So once they have a good volume available, I believe we will have a good percentage in our product mix.

Jon Tanwanteng

Got it, thank you. And then if I could sneak one more in there, if I could. Is there more efficiency to be unlocked in your liquid-cooling supply chain or have you mostly resolved the issues in ramping your production capacity and supply chain there?

Charles Liang

We focused on liquid-cooling much earlier than the industry. So in last few months, we already shipped more than 2,000 racks, right? And so far the feedback from customers are very happy indeed that our quality the customer satisfaction even better than our air cooler solution. So we are very excited. Our hard work in the last three years got paid off and we believe the recording will continue to be our major advantage including the whole data center end-to-end total solution. Again not just DLC cooling direct but kind of deployment, cabling, service management software. So we are very excited for our DLC deploying solution and customer like that.

Jon Tanwanteng

Great. Thank you and good luck with finding a new auditor.

Charles Liang

Thank you.

Operator

Thank you. The following comes from Mehdi Hosseini with SIG. You may proceed.

Mehdi Hosseini

Yes, thanks for taking my question. David, from what I understand regarding cash flow, it seems like there was a one-time positive impact. Your days of inventory went up but you were able to significantly increase your operating cash flow. Can you — did I hear you correct? And if so, what is the item that helps you with positive operating cash flow?

David Weigand

Sure. I think the answer is, Mehdi, that we’ve been growing at such a high rate and — over the past quarters that, that’s really what’s been impacting our operating cash flow is that we’ve had to pour hundreds of million dollars into inventory as well as into accounts receivable. So kind of coming off of a quarter where we didn’t have such a dramatic increase in revenue, we were able to generate a lot of cash, basically $1 billion worth of improved cash flows. So it was really — yeah, so it was really just the fact that for the reasons Charles mentioned, the growth wasn’t as high — and we didn’t answered your questions.

Mehdi Hosseini

Yeah. I understand. But your DSO went up. I’m sorry, your days of inventory went up. And I think from what I heard from you, your DSO didn’t really change. So was that improvement in operating cash flow all driven by working capital reduction or was there something outside of working capital that helped you?

David Weigand

No, it was really for those reasons. It was really just for the inventory equation.

Charles Liang

Yeah. Mehdi, I mean, maybe I can help with it. I mean, when we grow about 200% more year-over-year, right, so for sure — and we see continue to grow, right? So for sure, we need a much higher inventory to support our customer demand. And then when our growth become more normal, now, 200% year-over-year, for example, 100% or 80%, then we don’t grow that much of inventory and that will help our cash flow. So it’s a good trouble, I would have to say. It is a good challenge.

Mehdi Hosseini

Sure. Got it. And then Charles, maybe you can help us — give us an update on your total capacity, especially with the Malaysia expansion. And how should — how is the utilization of the global installed capacity tracking?

Charles Liang

Very good question. We expect we will continue to grow very fast. That’s why we have been preparing a huge capacity in Silicon Valley, in Taiwan and now especially, Malaysia. So long term, we need those capacity. But in terms of utilization rate at this moment, I would like to stay a little bit low because capacity is ready, but no such — no enough new chip, as you say that. No enough new chip. That’s why the elevation rate now is relatively low, maybe only 50%.

Mehdi Hosseini

I see.

David Weigand

Yeah. This is Dave.

Mehdi Hosseini

Sure. Sorry, David, go ahead.

David Weigand

This is Dave. Yeah. I was going to give you a couple of other tips on cash flow. You’ll probably notice that because of an improved gross margin, we had almost $80 million on a non-GAAP basis. More profit this quarter. In addition to that, again, going back to working capital metrics, we increased our accounts payable by several hundred million dollars. So that, those are other factors that go into improved operating cash flow.

Mehdi Hosseini

Got you.

Michael Staiger

And Tamia, before we go to the next question — thank you, Mehdi. Before we go to the next question, I just wanted to clarify one of the comments from earlier with respect to NVIDIA and clarify. We had the deepest of relationships with NVIDIA at the technology level. It goes back decades with mobile and now we have multiple state-of-the-art projects in progress. And we spoke with NVIDIA and they’ve confirmed they’ve made no changes to allocations and we maintain a strong relationship with them and don’t expect that to change. So I just wanted to make sure that was clarified.

Next question. Actually, our last question, Tamia.

Operator

Absolutely. Our final question comes from Quinn Bolton with Needham & Company. You may proceed.

Quinn Bolton

Hey guys, thanks for taking the question. I guess just want to follow up on the kind of the slightly weaker-than-expected first half. Really sounds like it’s just customers waiting for new Blackwell chips. Are you guys seeing that starting to show up in the order books? Meaning, you’re building backlog for either the NVL Rack or the Blackwell B200 systems. So you see nice building backlog for those systems. Obviously, you don’t know when you’ll get the chips, but that gives you confidence for a much stronger second half once Blackwell starts to ship. Or is it too early for you guys to be actually getting those orders or POs at this point?

Charles Liang

Yeah. Our solution is very strong and I believe NVIDIA will continue allocate their solution to the company, the customer who have a best total solution. Because at all common end-user satisfaction is the most important to every company, right? So I would like to say our solution is very strong and we continue to work with NVIDIA very closely, aim to provide the best total solution, end-to-end solution to customers. That’s why we start to provide on-site deployment, on-site cabling, on-site service and all those new offerings. Very attractive to lots of new customers and our old-customer. So we feel very comfortable for coming soon new chip solution.

Quinn Bolton

So the backlog for Blackwell, you’re seeing that building on your order books?

Charles Liang

We provide in kind of remote POC now and so things are happening.

Quinn Bolton

Okay. And second, a follow-up question for David. You’ve recently sort of filed new credit agreements with both of your banks just setting a date when you would have to provide the audited financials. To the extent that you don’t hit that date, what happens? Do you just have to go renegotiate new credit agreements? Do the banks at that point have the right to effectively call those term loans? So just wondering if you might be able to address what happens with both the bank debt and if there’s any risk to the convertible debt if you don’t provide audited financials within the prescribed time.

David Weigand

Yeah. So I think we’ll just refer you to our 8-K filings. We have long-term and good relationships with the banks. And so, as necessary, we will file extensions, yeah, or get waivers. And like as I mentioned earlier, we’re not concerned about the company’s ability to access the capital markets.

Quinn Bolton

Thank you.

Operator

Thank you. There are currently no other questions in the queue, so I will now turn it back over to the management team for closing remarks.

Michael Staiger

Hey, thank you for joining our conference call today, and we’ll look forward to talking to you soon.

Operator

[Operator Closing Remarks]