Super Micro Computer Q1 2027 Earnings Call Transcript

Super Micro Computer (NASDAQ:SMCI) reported first-quarter financial results on Tuesday. The transcript from the company’s first-quarter earnings call has been provided below.

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Summary

Super Micro Computer reported first-quarter fiscal 2027 revenue of $19.9 billion, exceeding prior guidance and reflecting strong demand for AI and data center solutions.

Non-GAAP gross margin improved significantly to 12.8%, driven by a favorable customer mix and the success of their DCPPS model, which integrates hardware, software, and services.

The company raised its full-year revenue guidance to $72-$82 billion, citing robust demand but acknowledging potential supply constraints and macroeconomic uncertainties.

Super Micro Computer highlighted strategic partnerships and advancements in AI product offerings, including new launches on NVIDIA, AMD, and Intel platforms.

Management emphasized the importance of customer prepayments in supporting working capital efficiency and expressed confidence in maintaining cash flow to support growth without additional equity raises.

Full Transcript

OPERATOR

Thank you for standing by. My name is Jen and I will be your conference operator today. At this time, I would like to welcome everyone to Super Micro Computer’s first quarter fiscal year 2027 earnings. Joining us today are Charles Liang, Founder, President, and Chief Executive Officer; Mark Long, Chief Financial Officer; former Chief Financial Officer David Weigand; and Michael Steger, Senior Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Thank you. Michael Steger, you may begin your conference.

Michael Steger (Senior Vice President of Corporate Development)

Thank you, Jen. Good afternoon and welcome to Super Micro Computer’s conference call for the first quarter of fiscal 2027. As you heard, with me today are Charles Liang, Founder, Chairman, Chief Executive Officer; Mark Long, Chief Financial Officer; and former Chief Financial Officer David Weigand. By now you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company’s website.

Our call is being webcast live on Super Micro Computer’s investor relations website and will be available for replay until the conference call later to discuss our financial results for the second quarter of fiscal ’27. The content of today’s call is Super Micro Computer’s property. It can’t be reproduced or transcribed without our prior written consent. During this call, we may make forward-looking statements based on current expectations, including with respect to our business plans and performance, ongoing market trends, and future financial results. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release, our most recent Form 10-K and 10-Q, and the reports that we may file on Form 8-K with the Securities and Exchange Commission.

All of our statements are made as of today, November 3, 2026, and are based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our prepared remarks, which are posted on our website. Our second quarter of fiscal ’27 quiet period begins at the close of business Friday, December 11, 2026.

With that, let me turn the call over to Charles.

Charles Liang (Founder, President, and Chief Executive Officer)

Thank you, Michael, and thank you all for joining us today. Following fiscal 2026, where we nearly doubled our annual revenue, fiscal 2027 is off to a record start. Q1 revenue reached $19.9 billion, between the high end of our pre-announcement and well ahead of our original outlook of $15 billion. This is a great achievement, and it shows more and more customers prefer our AI and its total solutions, most importantly our data center building block solution.

DCPPS is central to this growth, driving deep customer trust and preference, enhancing our profitability, and creating sustainable long-term shareholder value. For over 30 years, Super Micro Computer has always been focused on delivering optimized total-solution value to our customers. We will continue leveraging our engineering technology, global resources, and manufacturing capacity with high yield to accelerate customers’ deployment. Moreover, I’m glad that not just large cloud and near cloud, small cloud companies and organizations across enterprise, storage, IoT, and both country and corporate storming verticals are relying on and adopting Super Micro Computer’s total solution every day.

We have executed our commitment to drive higher bottom-line profitability. In Q1, non-GAAP gross margin expanded by 330 basis points year over year to 12.8%. This expansion was driven by a healthier customer mix across enterprise AI and IT accounts, a diverse product line built on our system building blocks, and the growing revenue contribution from our higher-margin DCPPS model, including our DCPPS hardware, software, and unique service stacks. This directly aligns with our strategic roadmap to build a sustainable double-digit gross-margin model by delivering superior technology innovation, faster TTM and TTD—faster time to market and faster time to deployment—and total-solution value proven over more than two years in real-world customer deployments.

DCPS delivers four key values that non-traditional server OEM and overseas CM can’t match. First, optimize TTD—time to delivery—by delivering factory-tested, plug-and-play rack-scale systems and DCPPS building-block complete solutions, including data center management software, directly to customer sites. Second, optimize TTO—time to online—shortening live compute readiness from quarters to months and further down to weeks. Third, DCPS maximizes system uptime through building blocks that eliminate thermal, power, software, and service bottlenecks.

And number four, lower TCO by slashing energy consumption and facility downtime to accelerate and improve data center profitability. Whether our customers are building gigawatt-scale AI factories or deploying rapid single-container pod solutions, Super Micro Computer’s DCPS helps build AI infrastructure faster, better, greener, and at a lower cost to our customers. Because optimized hardware alone cannot run an efficient AI data center, managing thousands of deep-core GPU racks requires intelligent real-time software orchestration. Super Cloud Composer (SCM) delivers seamless large-scale management and full-stack hardware/facility integration.

Super Micro Data Center Manager (SDM) provides complete power and thermal control from individual nodes up to floor/building infrastructure for end-to-end hardware lifecycle management, and our Super Micro Operation Manager (SOM) suite, featuring Director and Developer Console modules, enables bare metal, model, and token-as-a-service with ease for LLM and agentic AI workloads. Attaching SCM, SDM, and SOM directly to our TCPPS portfolio eliminates software fragmentation for our customers while driving higher-value software attach rate.

Furthermore, SCM enhanced cohome ServiceNow features AI-driven low-cost diagnosis, significantly improving data center uptime and giving our customers complete operational confidence. Equally critical to our total-solution advantage is our new expanded global data center service organization. Here, our on-site deployment teams, backed by R&D engineers and well-trained post-deployment service staff, work directly alongside customers’ teams through TL service offering to efficiently maximize cluster uptime. By using automated telemetry, our service team continuously monitors thermal, power delivery, and node errors in real time to solve potential problems before they cause downtime, while our dedicated on-site engineers handle deployment validation and immediate hardware maintenance.

This proactive high-touch service model builds deep customer trust, drives high-value recurring service revenue, and fulfills our highest commitment: bringing complete peace of mind to our customers through high-quality infrastructure total solutions. To realize this unmatched breadth of solution efficiency, our global manufacturing footprint and scale are advancing rapidly. We are actively expanding our physical footprint with major projects underway in Silicon Valley and Taiwan that will add millions of square feet of fully automated production space and active service bandwidth. Furthermore, we are accelerating our containerized data center production in Asia and the USA. Together, our global manufacturing and service network put us on track to produce more than 8,000 of our most powerful racks per month, including over 4,000 DLC racks by this December.

On the technology front, Super Micro Computer continues to lead the market across major silicon platforms. We are among the first to market shipping NVIDIA Vera Rubin NVL72 racks with our DCPS and DLC2 nuclear-cool stack. We recently have also launched the NVIDIA Rubin and Bellarubin CPU rack, and they are ready to ship now as well. By the way, our optimized DSX pod solutions are also coming soon for AMD MI350 and MI355X platforms, with good demand momentum now still, as we advance to HELS and MI450 total solutions.

Additionally, we are progressing Intel Xeon 6 platforms alongside our new ARM AGI CPU-based solutions optimized specifically for the agentic AI market. At the same time, we continue to expand our comprehensive edge and IoT product portfolio while consistently growing our storage product line, bringing real-time, complete packages of inferencing capability directly to the intelligent edge. These new products accelerate our strategic focus on enterprise customers as companies expand toward scaling agentic models, enterprise data governance, and high-throughput invention workloads.

We recently announced several major strategic partnerships, combining Super Micro Computer’s DCBBS with the world’s deep-in technology companies, including Cisco, NetApp, Nutanix, and others. With additional tier-one partnerships coming soon, we are embedding Super Micro Computer’s DCPPA’s footprint deeply into the world’s most trusted enterprises. I know some investors and market experts have recently raised questions and concerns about AI capital expenditure efficiency and return on investment.

Let me be clear: Super Micro Computer is uniquely positioned to thrive in this environment. For over 30 years, we have been focusing on the server and storage industry right here in the United States, longer than almost all of our competitors, building a mature, well-established domestic manufacturing and engineering footprint that our competitors simply have to match. This deep U.S. heritage, combined with our unique DCPPS hardware, software, and service total solution, directly solves the ROI challenge for our customers by optimizing TTD—time to delivery—TTO—time to online—and computing uptime and energy efficiency.

Whether our customers are building massive tier-one AI factories or deploying enterprise agentic AI workloads, Super Micro Computer ensures their capital investments convert into revenue faster and more cost-efficiently than anyone else. We believe we are driving strong internal discipline through continuous operational optimization, factory automation, and skill development. Through technology process refinement and training, we have successfully reduced our inventory and production turnaround time from about 100 days to 74 days over the past three quarters. Looking ahead, our target is to further streamline our inventory and production cycle down to 50 days over the coming quarters.

It’s not easy, but we believe we will achieve it. This ongoing efficiency optimization will continue to strengthen Super Micro Computer’s cash flow working-capital cycle and drive higher bottom-line profitability. As a matter of fact, no matter how competitive the market gets, more customers will love Super Micro Computer DCBPs that include data center end-to-end hardware management software and end-to-end data center services. Now let’s turn to our outlook for fiscal year 2027. While overall demand and our growth momentum remain very strong across every firm, we must recognize that key components shortages continue to impact delivery timelines across the IT industry. Even GPU, new customer programs, and strategic ecosystem partnerships are ramping strongly. But we want to remain prudent about some key components’ availability and volatile pricing. Based on what we see today, we anticipate our fiscal 2027 revenue target will be in the range of $72 billion to $82 billion.

That is about 12% higher than the target we set one quarter ago. Before I turn the call over, I want to highlight a few important leadership updates. First, we are pleased to welcome a long-time industry technology leader, Sasha Krishna Pura, to our Board of Directors, bringing deep data center operational experience and expertise to support our scaling. Second, my sincere thanks to David Weigand for his six years of CFO leadership during our period of massive growth. We look forward to his ongoing support and contribution in optimizing our operation to a much bigger scale.

Finally, I’m delighted to introduce Mark Long, our new CFO, whose dedicated, I guess, 30, 40 years of tech and financial leadership will be a strong head for our next phase of growth. Now I will turn the call to Mark.

Mark Long (Chief Financial Officer)

Thank you, Charles, and good afternoon, everyone. This is my first call with you, so let me take two minutes before we get to the numbers. I’ve spent much of my career in technology infrastructure finance, including as Chief Financial Officer of a public company in this industry. What brought me to Super Micro Computer is that the hardest part is already built: deep engineering advantage, a real lead in liquid cooling and rack-scale integration, and a key position in the largest infrastructure buildout of our careers.

What the company needs now is financial capability that matches its engineering and operating capability. I’m excited to join Super Micro Computer at this pivotal time and look forward to helping Charles and the team continue to deliver an expanding portfolio of innovative solutions to a growing global customer base, including some of the largest, most demanding customers who are shaping the future of the AI era. To do that will require continued financial discipline, transparency, deeper engagement with stakeholders, working capital management, and capital structure optimization, which will be my areas of focus.

Now to the quarter. Total revenue was $19.9 billion, up 290%, 98% year over year and 79% sequentially. That is above our guidance range of $14.5 billion to $15.5 billion and above the preliminary range of $18.5 billion to $19.5 billion we provided on October 20th. As Charles noted, approximately $2.3 billion represented deployments originally scheduled for earlier periods due to customer and data center readiness. Excluding that, underlying revenue was approximately $17.6 billion.

AI solutions contributed approximately 71% of revenue compared with 59% in Q4. Based on our current backlog, we expect AI-related solutions to represent approximately 70% to 80% of revenue for fiscal 2027. Enterprise and channel revenue was $4.9 billion, or 25% of revenue, up 229% year over year and down 12% sequentially. OEM appliance and large data center revenue was $14.7 billion, or 74%, up 321% year over year and 167% sequentially, driven by production ramps on several large AI data center design wins. The 5G, telco and edge segment, while still small in relative terms, grew significantly both year over year and sequentially.

By geography, the United States represented 80% of revenue, Europe 11%, Asia 6% and the rest of the world 3%. The United States grew 771% year over year and 103% sequentially. While the U.S. remains the largest market for large-scale AI data centers, we are seeing growing momentum in other regions as large customers expand globally and governments and enterprises plan and fund significant AI data centers in Europe, Asia and the Middle East. In the quarter, one large data center customer represented 44% of revenue compared with 28% for fiscal 2026 as a whole. In our 10-Q, you will also see that two customers accounted for 49% and 17% of accounts receivable at quarter end. I want to provide more context for this. Concentration at this level is a consequence of the scale at which AI infrastructure is now being built. A single deployment today can exceed our total quarterly revenue from just one year ago.

We expect concentration to stay elevated while these buildouts run and to moderate as our enterprise and sovereign businesses grow. What matters alongside the concentration is the quality of the exposure. So let me give you that. Deferred revenue increased by approximately $3.1 billion during the quarter, an overwhelming majority of which reflects customers paying in advance of delivery. Days sales outstanding improved from 59 days to 36 days. We recorded no material credit losses in the quarter.

On large deployments we frequently require deposits and often bill against delivery milestones. We evaluate counterparty credit before committing manufacturing capacity and critical components, and we maintain a $1.8 billion receivables purchase facility that gives us flexibility on both cash timing and credit exposure. We have declined business in this market on terms we were not comfortable with, and in the current environment I expect we will continue to make that choice.

Non-GAAP gross margin was 12.8%. That is 200 to 240 basis points above our guidance range of 10.4% to 10.8% and 330 basis points above the first quarter of last year. On a GAAP basis, gross margin was 12.7%. It is also down 480 basis points from the 17.6% we reported in Q4, and I want to take that apart because a single-factor explanation would be misleading. The key factor impacting gross margin was the Q1 AI revenue mix, which increased from 59% in Q4 to 71% in Q1.

The customer and product mix within our Q1 business was weighted toward large-scale AI deployments, which carry lower gross margins than the more diversified enterprise and channel business. Benefits from tariff relief and lower inventory reserves during the quarter were largely offset by certain lower-margin deferred revenues which were recognized during the quarter. I want to be precise about one point because I know how the mix figures can be read.

The sequential decline is not evidence that AI platform revenue lacks margin; it reflects which customers took delivery in which quarter. The clearest way to see the underlying trend is to look at the last two quarters together, which neutralizes the deferral timing. Across Q4 and Q1 combined, revenue was approximately $31.1 billion and non-GAAP gross margin was approximately 14.5%. For the same two quarters a year earlier, revenue was approximately $10.8 billion and gross margin was approximately 9.5%.

On that normalized basis, revenue nearly tripled and gross margin improved by roughly 500 basis points. We continue to demonstrate significant operating leverage. Revenue grew 298% year over year against an 89% increase in non-GAAP operating expenses. GAAP operating expenses were $477 million, up 67% year over year and 5% sequentially. Non-GAAP operating expenses were $384 million, up 89% year over year and 8% sequentially. The sequential increases reflect higher headcount costs and research and development spending as we invest in multiple new platforms for AI data center and enterprise applications.

Non-GAAP operating margin was 10.9% compared with 14.3% in Q4. Here too, the two-quarter view is more useful. Across Q4 and Q1 combined, non-GAAP operating expenses were approximately $741 million, or about 2.4% of revenue, and non-GAAP operating margin was approximately 12.1% compared with roughly 5.4% for the same two quarters a year earlier. We intend to keep investing in R&D, field service and our global footprint, and we expect operating expenses to keep growing well below the rate of revenue. Other income and expense was a net expense of $34 million consisting of $49 million of interest expense and other expense, offset by $83 million of interest income on our convertible notes and revolving credit facilities. The tax provision was $435 million on a GAAP basis and $455 million on a non-GAAP basis, with an effective tax rate of 21.4% on both bases.

I would like to expand on some points made in the last earnings call regarding earnings per share because our capital structure now has a moving part that I do not think is well understood. We calculate earnings per share using the two-class method, which reflects the mandatory convertible preferred stock we issued in Q4. That instrument carries a fixed dividend of approximately $75 million per quarter and converts to common stock in June 2029. Between now and then, both the dividend and the allocation of earnings to that participating security reduce earnings available to common shareholders.

This quarter, by approximately $312 million. In aggregate, GAAP diluted earnings per share were $1.75 against guidance of $0.89 to $0.98. Non-GAAP diluted earnings per share were $1.81 against guidance of $1.01 to $1.10. GAAP basic earnings per share were $1.92. Now to working capital, which I think will help explain key elements of how we operate our business. Our cash conversion cycle improved from 149 days to 97 days, a 52-day improvement in a single quarter. At our Q1 revenue run rate, that difference represents roughly $10 billion of working capital the business would otherwise have needed to fund. The cash flow statement shows this. We used $434 million of cash in operations on $19.9 billion of revenue.

For all of fiscal 2026, we used $6.8 billion on $39.1 billion of revenue. Capital expenditure in the quarter was $47 million, so free cash flow was negative $481 million against negative $7 billion for fiscal 2026. Let me break down the 52 days, including both the positives and the areas for potential improvement. Days of inventory improved 45 days to 74 days. Days sales outstanding improved 23 days to 36, helped by faster collections and by customer prepayments. Days payable outstanding moved against us from 29 days to 13, which consumed roughly $3 billion and reflects timing of payments to suppliers in a supply-constrained environment. The largest single driver was customer prepayment.

Deferred revenue increased approximately $3.1 billion in the quarter. Accounts receivable grew $3.6 billion and inventory grew $2.5 billion to support the revenue ahead of us, and prepayments funded most of that build. We expect the cash conversion cycle for the current quarter to be within the band of or 10% vs. Q1, which enables us to appropriately manage our working capital while also executing against attractive market opportunities. We ended the quarter with $6.9 billion of cash and cash equivalents. Bank borrowing and convertible notes totaled $8.6 billion for net debt of $1.7 billion, compared with $1.2 billion at the end of Q4. Inventory was $15.1 billion, up from $12.9 billion, built to support the revenue we expect in coming quarters. We are in compliance with all covenants at quarter end.

On capital structure more broadly, we are starting from a strong foundation. The $5.6 billion we raised in June was raised specifically to fund the working capital behind the orders we are now delivering. As we identify high-quality growth opportunities, we will optimize our capital structure to support them, and we will do that in ways that fortify the balance sheet without taking on unnecessary costs. That means matching the duration and the form of our funding to the working capital and the assets it supports, and being deliberate about when and whether we access markets.

I will be transparent with you every quarter about dilution, maturities and available capacity. We ended the quarter with a record backlog, providing stronger visibility for the current quarter and the remainder of the fiscal year. Turning to guidance for the second quarter of fiscal 2027, we expect net sales of $19.5 billion to $21.5 billion and gross margin of 12% to 12.5%. We expect GAAP diluted earnings per share of $1.59 to $1.83 and non-GAAP diluted earnings per share of $1.66 to $1.90. That guidance assumes GAAP operating expenses of approximately $455 million, including approximately $102 million of stock-based compensation, which is excluded from non-GAAP.

We expect other income and expense, including interest expense, to result in a net expense of approximately $58 million, GAAP and non-GAAP tax rates of approximately 21%, a GAAP diluted share count of approximately 753 million and a non-GAAP diluted count of approximately 769 million, preferred dividends of approximately $75 million, and capital expenditure of $70 million to $80 million. For the full fiscal year, we are raising our revenue outlook to $72 billion to $82 billion from $65 billion to $72 billion. We expect full-year gross margin of 11.8% to 12.2%. Let me connect that to the quarter we just reported. Q1 included approximately $2.3 billion of catch-up from prior period deployments, so underlying revenue was approximately $17.6 billion. The full-year range does not assume that catch-up repeats. It does assume continued sequential growth in underlying demand, and it reflects materially better visibility into customer deployment schedules than we had 90 days ago.

Our business continues to strengthen, and momentum is building for fiscal 2027, although we are gated by supply constraints and data center readiness, and we are focused on disciplined execution, creditworthy counterparties and expanding our higher-margin revenue streams. On margin, I want to be straightforward about what the full-year range implies. With Q1 at 12.8%, Q2 guided to 12% to 12.5%, the full-year range implies gross margin in the second half below the first half. That is a mix effect. We expect AI solutions to move toward the upper end of the 70% to 80% range as the large deployments in our backlog ship, and those carry lower gross margin than enterprise and channel verticals. Within each category, we expect margins to hold or improve.

What governs the range is not demand, and it is not our ability to build. It is the pace at which customer facilities become ready to receive what we have already manufactured and the availability of key components. The binding constraints on AI buildouts across this industry right now are land, power and data center shells. We have better visibility into that than we did, and we will update you as the year progresses. Let me close where I started. This was a quarter of strong growth with high-quality customers. Revenue nearly quadrupled year over year. Gross margin came in well above our guidance, and customer prepayments funded most of the working capital needed to deliver. Behind those results is a broad and innovative portfolio from DC, BBS, rack-scale and liquid-cooled systems to enterprise storage, edge and software that positions us for the most demanding workloads and the widest range of use cases in the AI buildout.

My focus going forward is the one I described at the outset: financial discipline so that growth is profitable growth; transparency so that you can see how this business works from quarter to quarter, including the timing effects that move our number; deeper engagement with all of our stakeholders; working capital management, building on the improvement in our cash conversion cycle this quarter; and a capital structure optimized to support high-quality growth from a strong foundation.

I’m looking forward to meeting many of you over the coming months. Michael, we are ready for questions.

Michael Steger (Senior Vice President of Corporate Development)

Great, Jen. Let’s poll for questions.

OPERATOR

Thank you. We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one. Again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Catherine Murphy with Goldman Sachs. Your line is open. Please go ahead.

Catherine Murphy (Analyst)

Great. Thank you for the question, and great to connect. First, I want to ask just about the raised revenue outlook. I understand that land, power, and data center shells are the binding constraints here, but I wanted to understand in your full-year outlook and then in your pipeline, what share of those projects do you have line of sight into the off-takers and the committed volume there? And then I have a follow-up question. Thank you.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah, I mean, as you know, the power and even GPU component shortage, right. But because our solution outperforms the industry solution, especially with our DCPS. DCPS not just provides a data center hardware building block, but software and service to help a customer build a data center quicker and also keep their computing power uptime much better. So indeed we continue to gain more customers and get more share. So we feel pretty optimistic for continual market share growth.

Catherine Murphy (Analyst)

And then as a follow-up, could you talk more about the customer prepayments in the quarter and how we should think about that continuing to support your working capital efficiency going forward? Is that something we can expect in the value that DCPS and the market share gain strategy that you’ve talked about?

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah, as you know, I mean now cash flow a little bit tight to a lot of companies, but at Super Micro Computer, because we have a better total solution—again, our DCPS—that attracts a lot of customers. So basically we see a good sign. Most of our customers are able to pay us on time, and we feel very solid to continue to grow our business. Mark made an assumption.

Mark Long (Chief Financial Officer)

Yeah, I think the, you know, the advantage as Charles pointed out is really around the quality of the customer base. So very large, creditworthy customers who pay very quickly, they provide very strong cash flow for us. But the broad customer base is providing more prepayments, and that discipline enables us to fund a lot more of this working capital. And, you know, I think you should expect that to continue. So we feel like we’re in a very good position.

The company has done a lot since they raised capital in the summer, and since then the cash conversion cycle has improved, so working capital efficiency has gone up substantially.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah. As we shared, we improved our business in terms of cash flow in two areas. One is we improved inventory and production turnaround time from about 100 days to now 70 days, and we believe we will be able to continue to improve the production and immediate turnaround time. Second point, as Mark just said, we are having a higher-quality customer, and those customers pay on time or even pay with quick turnaround. So we are very solid in this area.

OPERATOR

Your next question comes from the line of Ananda Barua with Loop Capital. Your line is open. Please go ahead.

Ananda Barua (Analyst)

Yeah, thanks, guys, for taking the question. Congrats on the progress. And Mark, welcome. I have two if I could. I guess the first one, Mark, is just on the gross margin and the way to think about the dynamics that are layering in through the balance of the fiscal year. Correct me if I’m wrong here. I actually have to hit the midpoint of your guide while down in the second half of the year, sort of flat around 12% the next three quarters, so correct me if that’s wrong.

And then really the question is, you talked about AI mix up, you know, being a factor in there. Could you share a little bit about inside of the AI customer base, like what are the moving parts on the margins? I think Charles in the past has talked about improvement in AI margins as we go forward, and just interested to know what the dynamics at play are there as you go through the rest of the fiscal year inside the AI margins. And I have a quick follow-up.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah. As I just shared, in the last three or four quarters our production time and also our production quality have dramatically improved, and that makes our turnaround time quicker and makes customers happier because of better TTD and better TTO to help customers time to online. So customers appreciate that. Plus, our DCVBS software and service help customers further and better quality customers. We continue to get more customers, especially including the enterprise agentic.

So all those are positively impacting our business.

Mark Long (Chief Financial Officer)

Yeah. And I think just to kind of build on what Charles said, in terms of the guide for the year, what you’re seeing is we have good line of sight, and now the business is stabilizing and kind of has this foundation in this 12% gross margin range, with room as we continue to diversify our customer base and our product sets to expand those gross margins further. So, you know, the precise modeling—you’re relatively close on your original question. But for us the visibility is very strong, and as Charles pointed out, the gross margin across all of our customer categories has improved. That’s really the important thing. And this is a function of what Charles was talking about in terms of our great engineering, our great product set, and the execution of the team. So we feel like we’re in a very good position at this scale, and we see enormous opportunities going forward.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah, like super helpful. With our DCPS, we provide not just data center computing solution hardware components but also software to help customers keep up time. So all those almost become one of our business modes. So customers like our product; more and more customers like our solution.

Ananda Barua (Analyst)

That’s really great context, guys. And the quick follow-up is, what’s the reasonable expectation for opportunity with the CPU business, just with all the structural tailwinds as you go through the fiscal year here? And that’s it for me. Thanks.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah, as you know, agentic AI is getting really popular. So we’re getting lots of customers, including lots of enterprise customers. They are buying our CPU-based solution, including Intel CPU-based, AMD, including NVIDIA version—our NVIDIA Vera solution is ready—and including ARM solution. So we see a much stronger CPU demand now. And looking forward,

OPERATOR

Your next question comes from the line of Joseph Cardoso with JP Morgan. Your line is open. Please go ahead.

Joseph Cardoso (Analyst)

Hi, thanks for the questions here, and Mark, looking forward to working with you. Maybe just for my first, if I could: it sounds like in your prepared remarks you’re not including any more catch-up or deferred deliveries in the guidance. But I guess maybe first question here is, can you just clarify if there are still deferred deliveries that are remaining and just not embedded in the outlook? And then the second portion of that question is, as we kind of strip that out of the numbers, you’re still kind of implying a moderation in growth going into the second half of the year versus the first half.

So maybe can you just walk us through the dynamics that are influencing that, and if it has anything to do maybe with the concentration with your largest customer maybe fading going into the back half? And then I do have a follow-up. Thank you.

Mark Long (Chief Financial Officer)

Yeah, I think the key point about deferred revenue historically, kind of looking back, was that there was this set of deliveries and deployments that had been delayed, and they had been carried over from prior quarters. In a typical quarter you will have some revenue recognition based on deliveries, and you may have one or two deployments that are delayed, but that was a larger than typical amount of revenue that had been deferred. And when that was released that caused, you know, a number of things: revenue went up, and as we mentioned, that was margin dilutive on an overall basis.

But going forward we don’t expect the same types and the same magnitude of delayed deployments through the deferred revenue. And most of the deferred revenue is either customer prepayments or, you know, we have our service and software revenue that we typically defer over a number of periods.

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah. The good thing is, you know, since we introduced DCPS, some of our customers and some of even our internal people got used to it, so that’s why they kind of had certain arguments about when to recognize. But now our DCVBS is a much more mature business. So not just our internal people are now familiar with our DCPS, and customers understand which services they buy, which services they did not buy. So we should not have that. So the situation is getting much clearer, much more mature.

So that will help our deferred revenue program.

Mark Long (Chief Financial Officer)

Yeah. And the second question regarding guidance implying moderation in growth in the second half, what you’re really hearing is just our sort of range of expectations based on the supply constraints and trying to gauge where the data center readiness for large deployments will land us. But as we mentioned in the prepared remarks, demand remains extremely strong, and especially the interest in the DCVBS product portfolio.

Joseph Cardoso (Analyst)

Got it, very clear. And then maybe as my second one, just dovetailing off of that a little bit, and maybe this is a two-parter as well. You’re talking about maybe shortages here going into, or kind of the supply tightness in terms of the total ecosystem. Can you maybe just touch on what’s the most binding constraint as you think about the 2Q and second half outlook? Is it largely associated with the GPUs, or is it other elements on the component side?

And then the second question is just more around, obviously within this backdrop of shortages, pricing has obviously been a strong element in terms of pass-through. Any way you can kind of help us think through, as we think about your ’27 outlook, how much of the growth is being driven by units as opposed to cost pass-through? Thank you.

Charles Liang (Founder, President, and Chief Executive Officer)

Very good question. I mean, the reason why we have a conservative number for annual revenue, 72 to 82 billion, is because we are concerned about some key component shortages and also macro economy. So if component shortages won’t be a big issue and if the macro economy is healthy, then for sure our second half will be much bigger than our first half. So we hope so, and that’s why we are very optimistic to see our second half have a much better performance than first half.

And if that’s the case, 72 to 82 billion becomes very, very conservative.

Mark Long (Chief Financial Officer)

Yeah. And, you know, I think your point about the growth in ASPs really driven by the cost of key components—that it’s been going up sometimes more than quarterly—you know, our outlook for the second half does not encompass significant growth in ASPs. So, again, we have a relatively conservative approach there, and we’re really looking at the details of customer deployments, what they need, which product sets, what our production capacity is, and how to manage that.

And as Charles pointed out, our demand far outstrips the availability of key components.

OPERATOR

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open. Please go ahead.

Charles Liang (Founder, President, and Chief Executive Officer)

Very good question. As you know, by end of the last quarter, our cash is 6 billion. Yeah, we never have so much cash in the bank. So indeed the cash flow at this moment, we don’t worry. Even if second half continue to grow strongly, if the macro economy is healthy, our cash flow is in much stronger position than before ever.

Mark Long (Chief Financial Officer)

Right? Yeah. As Charles pointed out, I mean, starting with $6.9 billion of cash puts us in a very good position. As we mentioned, our working capital efficiency has gone up. Our ability to fund our working capital needs through our, you know, focus on high-quality customers and some customer prepayments, that puts us in a great position so that we can optimize our capital structure. We can think about trade-offs if we have very attractive opportunities that require incremental funding.

We have our $1.8 billion working capital facility and, you know, we have the opportunity to kind of access other markets. As you point out, both the credit and equity markets, at this point we don’t have any plans to consider equity raises. And, you know, as far as the debt markets, I think we would look at kind of, you know, what was available and how it would best position the company for continued success and provide us with the right leverage structure.

OPERATOR

Due to time constraints, we’ll be taking one final question. This question comes from the line of George Nautter with Wolfe Research. Your line is open. Please go ahead.

Brendan Rogers (Analyst)

Hi, guys, it’s Brendan Rogers on for George. I guess just a question on what’s changed in your conversations with customers in the last 90 days in order to get this better visibility, like, is this a feature of today’s market? Like customers are extending the forecast timelines that they’re giving you, or is this sort of more of a shift in how you’re managing the business?

Charles Liang (Founder, President, and Chief Executive Officer)

Yeah, as we mentioned, we have a strong, strong back order. And so we have a choice to select healthy customer and customer order quality. Customer quality is very important to us. So we have a chance to selective from some point of view.

Mark Long (Chief Financial Officer)

Yeah. And I think, as Charles pointed out, we are getting better visibility from a number of our customers, some very large, some moderately large. And we’re getting visibility across geographies and so

Charles Liang (Founder, President, and Chief Executive Officer)

many enterprises.

Mark Long (Chief Financial Officer)

Yes. And the growth of the enterprise business is, is another factor that will provide enhanced visibility and stability to our overall revenue stream.

OPERATOR

We have reached the end of the Q and A session. This concludes today’s call. Thank you for attending. You may now disconnect.

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