Super Micro Computer Inc (NASDAQ: SMCI) Q4 2022 Earnings Call dated Aug. 09, 2022
Corporate Participants:
Nicole Noutsios — Investor Relations
Charles Liang — Founder, President, Chief Executive Officer, Chairman of the Board
David Weigand — Senior Vice President, Chief Financial Officer
Analysts:
Nehal Chokshi — Analyst
Ananda Baruah — Analyst
Jon Tanwanteng — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Super Micro Computer, Inc’s Fiscal Fourth Quarter 2022 Results Conference Call. [Operator Instructions]
Thank you. Nicole Noutsios, Investor Relations, you may begin your conference.
Nicole Noutsios — Investor Relations
Good afternoon and thank you for attending Super Micro’s call to discuss financial results for the fourth quarter which ended June 30, 2022. With me today are Charles Liang, Founder, Chairman and Chief Executive Officer; and David Weigand, Chief Financial Officer.
By now, you should have received a copy of the news release from the company that was distributed at the close of regular trading and is available on the company’s website. As a reminder, during today’s call, the company will refer to a presentation that’s available to participants in the Investor Relations section of the company’s website under Events & Presentations tab. We’ve 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 first quarter of fiscal 2023 and the full year 2023, and the potential impact of COVID-19 on the company’s business and results of operations. There are a number of risk factors that can 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 IR page of Super Micro’s website. We assume no obligation to update any forward-looking statements.
Most of today’s presentation will refer to the 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 today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today’s press release and in the supplemental information attached in 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.
Charles Liang — Founder, President, Chief Executive Officer, Chairman of the Board
Thank you, Nicole, and good afternoon, everyone. Today, I am pleased to announce record year end results with annual revenue surpassing a milestone of $5.2 billion, growing 46% year-over-year. We ended the year with another great quarter with fiscal Q4 2022 revenues of $1.64 billion, growing 53% year-over-year and 21% quarter-on-quarter, surpassing both top and bottom-line estimates. Our quarterly and year-end results were above our guidance given 3 months ago and exceeded our recently updated range given several weeks ago.
Our strong growth is fueled by recent ramp in design wins based on our rack scale Total IT Solutions, especially on GPU solutions and AI platforms. And I believe our solutions will continue to drive plenty of new design wins and further accelerate our strong growth in the coming quarters and years. More customers are also recognizing and adopting the value of our Green Computing Solutions due to the rising environmental challenges and energy cost. The Total Solution strategy and Green Computing Solution value have resulted in 4 consecutive quarters of growth, at minimum 3x faster than competitors’ growth rate.
Now, let’s look at some of the key highlights from the year and quarter. First, our quarter 2022 net revenue totaled $5.2 billion, up 46% year-on-year, above our guidance range of $5 billion. Our fiscal year non-GAAP earnings per share of $5.65, grew 128% year-over-year, compared to $2.48 a year ago. This exceeded the higher end of our guidance range of $4.53 to $4.71. Our fiscal fourth quarter net revenue totaled $1.64 billion, up 53% year-on-year and up 21% quarter-on-quarter, above our guidance range of $1.4 billion to $1.48 billion. Our fiscal fourth quarter non-GAAP earnings per share tripled year-over-year and was $2.62 compared to $0.81 a year go and was well above the high end of our guidance range of $1.51 to $1.69. It demonstrates the strong operating leverage and customer preference towards our rack scale Total IT Solutions.
With our Total IT Solutions business experienced a robust growth in U.S.A. this year, we will continue to gain even greater domestic traction going forward. We will also expand our Total IT solution to both Europe and Asia markets in the coming quarters and years. We are excited as this generation opportunity to become a global leader of rack scale plug and play IT solutions. Our robust fiscal year results reinforce our confidence in achieving the $10 billion in annual revenue target much sooner than we guided last year, and we are now preparing for our $20 billion mid-term mission that we disclosed last quarter.
Based on current supply and capacity, at the midpoint of our guidance range, we are forecasting $1.57 billion in revenue for the upcoming September quarter. I am also confident that our full fiscal 2023 revenue will be above the prior guidance range of $6 billion to $7 billion. We now expect revenue to be in the range of $6.2 billion to $7 billion with EPS at least at $7.50. Although the macroeconomic conditions are uncertain, we are optimistic that some of the supply chain and logistics issue will begin to subside.
From a market perspective, we continue to see increasing demand for accelerated compute and AI platforms. We are meeting this demand at both system and rack scale level with our Total IT Solutions, which are supported by over 20 years of system building block development. These building blocks allow us to create highly optimized rack scale plug-and-play datacenter solutions for our customers with lower infrastructure cost and increase in significant TCO savings. Our Total IT Solutions approach streamlines design, validation, sourcing and integration, resulting in much shorter lead times for our customers with optimized quality and performance. Moreover, our Total IT Solutions simplifies the intricacies of firmware, management software and division control.
In addition, our SuperCloud Composer, Orchestrator, security and other software products can optimally manage compute, acceleration, storage and network building blocks at a cloud level, including rich analytics. Datacenter operators can easily leverage this information to make critical decisions that improve workload efficiencies. Soon, we are expanding our investments in full datacenter management software stacks that will enable future infrastructure as-a-service and secure monitoring as-a-service functionalities, further enhancing our Total IT Solutions capabilities and value. This one-stop-shop approach is well-aligned with emerging growth markets across AI, Machine Learning, software-defined storage, networking, public and hybrid cloud, and 5G, IoT and Telco.
We previously shared that we will soon be deploying our Command Center-based intelligent business automation. This new B2B, B2C automation platform is being used and validated by more and more of our customers as we speak. This intelligent auto-configurator will leverage our system building block methodology, scaling out application-optimized solutions to a much broader customer base. We expect this tool will dramatically improve our go-to-market initiatives, product designs, operations, and service effectiveness. Most importantly, the automation process will considerably grow our customer base and improve customer satisfaction starting from pretty much this fiscal year. Our current manufacturing scale and capacity is built to support between $10 billion to $12 billion in annual revenue as we continue to ramp up our rack scale capabilities in our global facilities. During the June quarter, we shipped over a 1,000 plug-and-play racks.
Today, in the September quarter, we have doubled our rack scale capacity with enhanced features at our new Building ’23. Our rack scale capacity can be up to 6,000 racks per quarter now. Our product development activities continue to grow stronger with close partnership like NVIDIA, expanding our GPU system product lines including the new Delta Next H100, Redstone Next and Grace Hopper product lines. Our early deployment programs with the upcoming Intel Sapphire Rapids and AMD Genoa product lines are mostly ready, just awaiting for the new Intel and AMD processors to be available.
Switching gears, we stay committed to lead the market in Green Computing Solutions with our resource saving designs, both to reduce environmental impact and the cost of customers’ operations. As we apply our Green Computing Solutions at a rack scale level, we can bring even better quality and time-to-market value to our customers. Higher energy costs and limitation on electricity usage will continue to strain many companies in the near future. We saw this dynamic and challenges since a decade ago, and we have been at the forefront with technologies and solutions that help customers go for higher temperature operation datacenter, free-air cooling or liquid cooling.
Many of our customers have achieved significant TCO and PUE reduction in their data centers, down to 1.05 from industry average of 1.57 or even higher. By our calculations, worldwide adoption of our Green Computing Solutions, or other suppliers’ solutions with similar energy efficiency, would potentially save the IT industry more than $10 billion in electricity costs yearly or eliminating the equivalent of more than 30 fossil-fueled power plants. That’s equal to saving 8 billion trees on our planet. Personally, I am very glad to see increased demand for energy efficient solutions for cost savings, but more importantly, we must do this for our Mother Earth.
In closing, we are focused on building and delivering much more greener, rack scale Total IT Solutions. From an industry perspective, this is the greatest opportunity Super Micro has ever seen since our founding 29 years ago. Our year-over-year top and bottom-line performance is evidence that our Total IT Solutions strategy is accelerating. I see our room to grow is at least another 4x in the coming years while we believe that our TAM will continue to expand with new applications. We will continue to address this technology intersection by enhancing our Total IT Solutions capabilities and capacities with more software and services. We will continue to gain market share and expand to new verticals which increase our business scale and operating profits. My team and I will continue to execute our growth strategies and are accelerating the timeline to our $10 billion revenue target in short term and $20 billion midterm mission.
I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional details on the quarter.
David Weigand — Senior Vice President, Chief Financial Officer
Thank you, Charles. I am pleased to report fiscal fourth quarter revenues of $1.64 billion, a 53% year-on-year and 21% quarter-on-quarter increase. Our revenues exceeded our initial guidance range of $1.4 billion to $1.48 billion and our recently updated range of $1.58 billion to $1.63 billion. For fiscal year ’22, we reported revenues of $5.2 billion, representing 46% growth over fiscal year ’21 revenues of $3.56 billion. Our growth initiatives are gaining momentum with our Total IT Solutions targeting fast-growing markets and customers with accelerated GPU and AI workloads, software-defined storage and networking, public and hybrid cloud, and 5G, Edge, IOT platforms. These new growth drivers complement our traditional strength with enterprise, channel and OEM customers, leading to accelerated revenue growth, expanding margins and operating leverage.
In the fourth fiscal quarter, Super Micro recorded balanced revenues across all three of our market verticals demonstrating the resilient nature of our diversified end markets. We achieved $835 million in Organic, Enterprise and Channel and AI, ML revenues, representing 51% of Q4 revenues versus 62% last quarter, up 24% year-over-year and flat quarter-over-quarter. The year-over-year growth in this segment was driven by our growing list of large enterprise customers and new product offerings. Our OEM appliance and large datacenter segment achieved $717 million in revenues, representing 44% of Q4 revenues versus 32% last quarter, up 95% year-over-year and up 67% quarter-over-quarter with strong growth driven by large new and existing datacenter customers and OEM appliance customers.
Our 5G, Telco, Edge, IoT segment achieved $83 million in revenues, representing 5% of Q4 revenues versus 6% last quarter and was up 172% year-over-year and down slightly by 4% quarter-over-quarter. For the full fiscal year 2022, our Organic, Enterprise and Channel and AI, ML revenues grew 40% to represent 61% of fiscal year ’22 revenues. Our OEM appliance and large datacenter segment grew 44% and represented 32% of revenues. Our emerging 5G, Telco, Edge and IOT segment grew 163% and represented 7% of total revenues. Our mix of complete systems and rack scale Total IT Solutions has been increasing steadily. Systems comprised 91% of total revenue and subsystems, accessories represented 9% of Q4 revenues. On a year-over-year basis and also on a quarter-over-quarter basis, the volume of systems and nodes shipped as well as system node ASPs increased due to product and customer mix.
We had a balanced distribution of Q4 revenues across geographies, with U.S. representing 66% of revenues, Asia 17%, Europe 14%, and the Rest of World 3%. On a year-on-year basis, U.S. revenues increased 65% as we gained market share with our advanced, rack scale Total IT Solutions for emerging high-growth server workloads. Asia increased 38%, Europe increased 21%, and Rest of World increased 84%. On a quarter-over-year basis, U.S. revenues increased 41%, Asia decreased 9%, Europe increased 9%, and Rest of World decreased 30%.
The Q4 non-GAAP gross margin was 17.6%, up 200 basis points quarter-over-quarter from Q3 and up 390 basis points year-on-year due to price discipline, lower freight costs, leverage from higher factory utilization, operating efficiencies and a continually improving product customer mix. While the supply-chain disruptions continued, we achieved some success in controlling freight and other logistics costs through disciplined execution. Our Q4 gross margin was above the high end of our long-term target model range of 14% to 17% and demonstrates the success of our new, high-value Total IT Solutions.
Turning to operating expenses, Q4 OpEx on a GAAP basis increased slightly by 1% quarter-on-quarter and 15% year-on-year to $122 million. On a non-GAAP basis, operating expenses increased 4% quarter-on-quarter and increased 15% year-on-year to $113.5 million. Our non-GAAP operating margin increased significantly to 10.7% for the quarter versus 7.5% last quarter and 4.4% a year ago, demonstrating both improvements in gross margins driven by new product and customer mix and operating leverage driven by higher revenues along with disciplined expense controls.
Our non-GAAP operating margin of 10.7% for Q4 was also above our target model range of 5% to 8%. Other income and expense was approximately $1 million in income consisting of $4 million in foreign exchange gains offset by interest expense of $2.9 million as compared to $4.7 million in FX gain and $1.5 million in interest expense last quarter. Our interest expense increased sequentially as we utilized our short-term credit lines for financing inventory and accounts receivables. We also experienced higher short-term interest rates on borrowings driven by recent Fed actions.
This quarter, the tax provision was $25.8 million on a GAAP basis and $29.9 million on a non-GAAP basis. Our GAAP tax rate for Q4 was 15.5% and our non-GAAP tax rate was 17.1%. Our GAAP and non-GAAP tax expenses increased to higher level of pre-tax profits; but the tax rates were lower sequentially. Lastly, our share of income from our JV was $0.3 million this quarter as compared to $0.2 million last quarter. We delivered strong Q4 non-GAAP diluted EPS of $2.62 which exceeded the high end of the original guidance range of $1.51 to $1.69 and our recently updated range of $2.30 to $2.40.
The increases to EPS were due to a combination of higher revenues, higher gross margins from manufacturing efficiency, price discipline, product and customer mix and operating leverage. For the full fiscal year 2022, we reported non-GAAP diluted EPS of $5.65, which was up 128% year-over-year versus fiscal 2021 non-GAAP diluted EPS of $2.48 and higher than our initial guidance of $4.53 to $4.71. Cash flow used in operations for Q4 was $25 million compared to cash flow used in operations of $228 million for Q3 due to our improved profitability along with better management of our inventory and working capital.
Despite the 21% quarter-over-quarter increase in revenues, we trimmed our inventory by 3% quarter-over-quarter. Accounts receivable increased sequentially due to higher revenues, while accounts payable decreased sequentially due to the timing of payments to our vendors. Our CapEx was $11 million for Q4 resulting in negative free cash flow of $36 million versus negative free cash flow of $239 million last quarter. Our closing balance sheet cash position was $267 million, while bank debt was $597 million as we utilized our bank lines of credit to support higher revenues and accounts receivables as we ramped production of new design wins globally.
As we look ahead to fiscal 2023, we expect that our continued growth in revenue and profitability together with improved working capital management will lead to better operating and free cash flow. We are optimistic that some of the supply chain and logistics costs will begin to stabilize. We remain confident in our long-term outlook for robust revenue growth and profitability driven by our leading-edge new platforms, design wins, market share gains, and engagement with significant new global customers. We are announcing also a new $200 million stock buyback program today that will be in effect through January 31, 2024.
Turning to the balance sheet and working capital metrics compared to last quarter, our Q4 cash conversion cycle was 100 days versus 98 days in Q3 and above our target range of 85 to 90 days. Days of inventory was 106, representing a decrease of 11 days versus the prior quarter of 117 days as we managed our inventory more efficiently. Days sales outstanding was up by 3 days quarter-on-quarter to 42 days while days payable outstanding came down significantly by 10 days to 48 days.
Now turning to the outlook for our business, we remain enthusiastic about design wins in plug and play, rack scale Total IT Solutions ramping in multiple end markets. We are carefully watching the global macro-economic situation and continuing supply chain disruptions. For the first quarter of fiscal 2023 ending September 30, 2022, we expect net sales in the range of $1.52 billion to $1.62 billion, GAAP diluted net income per share of $2.01 to $2.27 and non-GAAP diluted net income per share of $2.07 to $2.32. We expect gross margins to be similar to Q4 levels.
GAAP operating expenses are expected to be approximately $126 million and include $8.6 million in stock-based compensation and $0.5 million in other expenses that are not included in non-GAAP operating expenses. GAAP and non-GAAP operating expenses are expected to increase due to continued investments in R&D and higher personnel costs. We expect other income and expense, including interest expense, to be a net expense of approximately $3.6 million and expect a nominal contribution from our Joint venture.
The company’s projections for GAAP and non-GAAP diluted net income per share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.3%, and a fully diluted share count of 54.8 million for GAAP and 56.2 million shares for non-GAAP. We expect CapEx for the fiscal first quarter of 2023 to be in the range of $6 million to $8 million. For the fiscal year 2023 ending June 30, 2023, we are giving guidance for revenues in the range $6.2 billion to $7 billion, GAAP diluted net income per share of at least $7.27, and non-GAAP diluted net income per share of at least $7.50.
The company’s projections for GAAP annual net income assumes a tax rate of 20.3% and a rate of 21.1% for non-GAAP net income. For fiscal year ’23, we are assuming a fully diluted share count of 55.6 million shares for GAAP and 57 million shares for non-GAAP. The outlook for fiscal 2023 fully diluted GAAP earnings per share includes approximately $35.4 million in expected stock-based compensation and other expenses, net of tax effects that are excluded from non-GAAP diluted net income per share.
Nicole, will turn it back to you.
Nicole Noutsios — Investor Relations
Operator, you can open the line up for questions.
Questions and Answers:
Operator
[Operator Instructions]. Your first question comes from Nehal Chokshi with Northland Capital Markets.
Nehal Chokshi
Congratulations on amazing results, amazing guidance, clearly showing sustainable share gains story here. Let’s talk about the gross margin, I think this is the first time I’ve heard Super Micro talk about better prices as a driver of gross margin expansion, which is great. But can you delve into why do you believe you’re exiting prices for now versus in the past?
David Weigand
Okay. So I missed just a little bit of what you said Nehal. You said — what was the question?
Nehal Chokshi
I believe, this is the first time I’ve heard you guys talk about price discipline being a driver of gross margin expansion. And so I’d like to understand why is that happening now?
David Weigand
Okay, got you. So, we have — it took us some time to adjust to the rising freight costs and another component costs. And so we managed to adjust those properly, and then, we also got some tailwind from finally from freight costs coming down 20% in Q4. So those 2 things combined allowed us to have a higher gross margin.
Charles Liang
Essentially our scale — our business scale continue to grow. We maintain a very good product line and also when business scale grow, yes, we will have a higher gross margin and net margin.
Nehal Chokshi
Got it, great. And then, can you give a little bit more detail on the driver of the — strength in the quarter which was leading edge vertical solutions and OEM appliance in large data center segments?
Charles Liang
Yes, recently we have indeed handful of really good product wins, including most of them indeed high-end AI platform. So our AI platform continue to gain market share and especially rack scale plug and play. We have completed rack installs to customer so it’s makes customer’s job much easier. And most of it and see what rack just starting to power cable then there are cable and then ready to run. So that really attract some customers.
Nehal Chokshi
What about within the OEM side? Was the driver there on OEM side?
Charles Liang
Designis indeed it’s pretty much our standard product. Our standard product for customer, we won some really top 10 highest value company around the world.
Nehal Chokshi
Okay, great. And then finally, what are your expectations for cash conversion cycle as the semi cycle appears to be entering a down cycle now?
David Weigand
Well, we expect our cash conversion cycle to come down Nehal, for a couple of reasons. Number one, our profitability has been increasing. And secondly, we’ve been able to manage our inventories better. So — and the reason for that is in Q3, we were building inventory as we were getting ready to start the launch of some design wins. And those design wins really, really got traction and that allowed us to kind of even out our inventory. So we expect our cash flow and cash conversion cycle to improve.
Nehal Chokshi
Great, Congratulations.
Operator
Your next question comes from the line of Ananda Baruah with Loop Capital.
Ananda Baruah
Congrats on strong results and very solid execution. Congrats on that. So I guess a few if I could. Kind of piggybacking of Nehal’s question, like in a bigger picture context, are there any other kind of key aspects of what you guys seeing going on just leading to the ongoing acceleration in revenue generation? And I guess, Charles, is it all share gain? Are there other things that you guys are seeing that’s been leaving the last couple quarters to the accelerated revenue generation run rate?
Charles Liang
Indeed, we started to focus on rack scale Total Solution, rack scale plug and play since the last 3 years ago, so it gets to the point where to make the infrastructure and make the other hardware, software from where people were trained. So now we start again — started with more and more deal, especially top 10 or top 30 highest-value company around the world. So we feel very comfortable, we will continue again to win more in AI, high-end platform and Total Solution, including storage, including switch. It’s kind of like a complete cloud or you can say rack scale plug and play solution.
Ananda Baruah
I got it. So it sounds like the big component is share gain, and it’s really continuing to resonate in the marketplace versus the Total Solutions you’re able to actually provide to the customer with that Total Solution. So it sounds like it’s just easier to use, and it’s stronger product, those two things combined. And yes, I would just say, are you seeing parts of the marquee aspects of your end markets actually accelerate? Well, I guess I’d love to know, like, what’s your opinion on kind of the tenor of demand in your key areas kind of the last 90 days versus the prior 90 days? It seems like you’ve actually seen some acceleration as the state from just share gain. But how would you guys characterize that particularly in the macro backdrop?
Charles Liang
Yes, actually you may know, I mean, AI, deep learning, being compared to grow, including like metaverse, lots of customer, lots of company continuing to invest heavily in those areas. And it’s for now we have — I would like to say exactly that pace for AI platform around the world, doesn’t matter, really high end, or kind of high volume platform enabled or rack scale enabled or cloud enabled. So our investment in that three start to gain customers attention as we save their lead time especially, most of the time in the industry, people take them maybe two miles to three miles to finish shipping a rack scale, cluster, and it takes us much shorter, because we optimize the inventory and total solution and ship to customer with a much shorter lead times and customer really appreciate that as well.
Ananda Baruah
Sorry, no, I don’t want to cut you off. That’s great content Charles. I’ll seed the floor for now. Appreciate it.
Operator
Your next question comes from Jon Tanwanteng with CJS Securities.
Jon Tanwanteng
The gross margin is about 17%, the high-end of your range. Is that sustainable over this year? And do you think that you should be changing your long-term target range a bit?
David Weigand
The answer is, yes, it is sustainable. And we will be reviewing our new target levels. But it’s really, as Charles mentioned, we’ve had a lot of customers come to us, and we’ve designed very special solutions for them. And these solutions have a value. And they’re high value to the industry and to our customers. And so we are — when I say price discipline, we’ve realized higher value for some of our solutions. And we’ve had the good fortune of being able to secure enough supply to start to ramp up of those solutions.
Jon Tanwanteng
That’s great news. And then, do you see any indications of your customers being impacted by recessionary pressures at all? And maybe go along with that, what assumptions, if any, are in your guidance regarding macroeconomic or geopolitical risk?
Charles Liang
It depends. Some customers, we saw them slow down a little bit, but lots of other customers indeed continue to increase their demand, especially for high-end AI platform, those future products. And by the way, I mean, there are lots of new technology comes in quarter-after-quarter or months after months. So at this moment, we believe that our macro economy may slow down a little bit, but our demand should be continue growing.
Jon Tanwanteng
Okay, great. And the guidance that you gave for the next quarter that sequential decline at the midpoint. Is that more indication of just seasonality or supply? Or is it maybe more of this macro slowdown that maybe some of your customers are seeing?
Charles Liang
Two reasons. One is supply chain. We still facing some supply chain constraints. Some parts have been more available than before, but still a lot of parts still in shortage, that’s one thing. Second thing is September quarter used to be our other big slow season. So both the reasons. And that’s why we try to be more conservative.
Jon Tanwanteng
Okay, understood. And last one if I may, just when do you need to think about investing in new capacity? I know you guys have up to $10 billion to $12 billion in your current facilities, but at your current growth rate, you probably have to start thinking about it pretty soon. So I was just wondering what your plans are, if you need to get there? And where you might start investing if you need to do so?
Charles Liang
An addition to that, because we do not focus on really global market yet, we are very strong in some countries, some territory, but in other countries, we are still pretty mean. So our solution is able to grow with much higher scale. We just need more warehouse, more production, making power and then we can achieve a more productive customers as hardware and software, firmware, Total Solution have been ready. We don’t have to replicate that end market to more countries and we already are a premium product.
Jon Tanwanteng
And again, congrats on a fantastic quarter.
Operator
[Operator Instructions] Your next question comes from Ananda Baruah with Loop Capital.
Ananda Baruah
Yeah, I just would love to get a little more context on the mix dynamic, Charles, that you guys — that you talked about in the prepared remarks. It sounds like a meaningful aspect of the mix is the Total Solutions. Are there any other components of mix that we should be aware of as contributing to that dynamic? Or is it primarily the Total Solutions that are resonating increasingly?
Charles Liang
Very good question. Indeed, likewise, we started to prepare rack scale plug and play about three years ago. So it took us quite a lot of effort to train our people to make order for CT or the component rate, especially a switch communication — networking device. And finally, everything ready and we start to gain more customers, gain more design wins, and I believe those design wins will continue. So at this moment, I feel pretty positive with our continued growth in those areas.
Ananda Baruah
That’s really awesome. And are there any particular verticals that those rack scales tend to go into or targeted at more, or that they’ll resonate with more or just sort of across all your verticals? Do you think the rack scale has a real place?
Charles Liang
AI, people learning, metaverse, omniverse and at the beginning, high end gaming, those automation, scientific application. So these are local area, even kind of lack of forecasting company, also having some strong demand.
Ananda Baruah
That’s super helpful context as always. Just, I guess, just let me ask two last quick ones here. Sounds like the backlog probably grew again, over the last 90 days, given your comment around constraints. Is that accurate?
Charles Liang
Yeah, because still there are a lot of shortage, and that’s why we will keep in our inventory so that we can support a continuing growth demand. Basically, our inventory is pretty healthy. We have some high-volume inventory, but they are under strong demand. So at this moment, I don’t worry about the inventory level.
Ananda Baruah
Great. And then last one for me, guys is, Charles, just an update on Taiwan? How would you characterize the utilization level there now?
Charles Liang
It’s growing faster, but we always suffering supply chain shortage in last nine months, already — nine months or nine months already. So I hope the supply chain will continue to getting better. And once that happen, our evaluation in Taiwan can be much improved. And at this moment, I believe our evaluation rate in Taiwan, only about 45% or so. So they are not assumed well.
Ananda Baruah
And so Dave, sort of 40 — let’s say 40%, 45% utilization. Does that mean when you guys get to sort of normalized utilization, we should still expect, Dave, what was it like the 150, 200 basis points in gross margin contribution on top of where you guys are right now?
David Weigand
From their shipments. Yes, that’s right. We said 100 to 200 from Taiwan.
Ananda Baruah
So 100 to 200 from Taiwan not 100 to 200. So it’s not 100 to 200 to the overall P&L, it’s 100 to 200 from Taiwan?
David Weigand
That’s correct. Yes.
Ananda Baruah
Got you. Now Taiwan is going to be approaching half year volume at some point. So would that sort of be long-term 50 to 100 basis points to the overall P&L?
David Weigand
That’s a fair way of looking at it.
Operator
[Operator Closing Remarks]