Super Micro Computer - Earnings Call - Q4 2017

Transcript

Speaker 0

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Super Microcomputer Incorporated Fourth Quarter and Fiscal twenty seventeen Conference Call. The company's news release issued earlier today is available from its website at www.supermicro.com. In addition, during today's call, the company will refer to a slide presentation and the CFO commentary, which can be accessed in a downloadable PDF format in its website at www.supermicro.com in the Investor Relations section under the Events and Presentations tab.

During the company's presentation, all participants will be in a listen only mode. Afterwards, securities analysts will be invited to participate in a question and answer session, but the entire call is open to all participants on a listen only basis. As a reminder, this call is being recorded today, Thursday, 08/03/2017. A replay of the call will be accessible until midnight, Thursday, August 1737, by dialing 40921 and entering replay pin seven million five sixty seven thousand four hundred sixteen. International callers should dial 671.

With us today are Charles Liang, Chairman and Chief Executive Officer Howard Hidechima, Chief Financial Officer and Perry Hayes, Senior Vice President, Investor Relations. And now I'd like to turn the conference over to Mr. Hayes. Mr. Hayes, please go ahead, sir.

Speaker 1

Good afternoon, everyone, and thank you for attending Super Micro's conference call on financial results for the fourth quarter and fiscal twenty seventeen, which ended June 3037. By now, you should have received a copy of today's news release 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 as well as the CFO commentary that is available to participants in the Investor Relations section of the company's website under the Events and Presentations tab. Before we start, I'll remind you that our remarks include forward looking statements. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations.

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10 ks for fiscal twenty sixteen and our other SEC filings. All of those documents are available from the Investor Relations page of Super Micro's website. We assume no obligation to update any forward looking statements. Most of today's presentation will refer to non GAAP financial results and outlook. An explanation of our non GAAP financial measures can be found in our slide presentation or in our press release published earlier today.

In addition, a reconciliation of GAAP to non GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.

Speaker 2

Thank you, Perry, and good afternoon, everyone. Let me summarize the fourth quarter. Revenue was $717,900,000 is 36.9% higher year over year and 13.7% higher than the previous quarter. Non GAAP net income was $20,700,000 Non GAAP earnings per share was $0.39 per diluted share compared to $0.38 last quarter and $0.20 last year. Non GAAP EPS was 95.8% higher year over year and 3% higher than last quarter.

Super Micro achieved new record high in revenue in the first quarter, which exceed our expectations. For the full fiscal twenty seventeen, our revenue was over $500,000,000 or 14% better than last year. Even more remarkable is that our fiscal twenty seventeen second half achieved 27.6 growth over last year, which is many multiples higher than the overall industry and any other Tier one vendors, which also demonstrates a strong momentum as we finish the fiscal year and coming to a major technology refresh cycle with Intel's new Skydex Xeon processor. Super Micro has built a strong foundation for sustaining high growth while maintaining profitability every quarter for twenty four years. Over the last three years, we have made a significant investment in global production capacity, operations, system solutions, quality, global service and management software.

In the same period, we have grown our engineering staff by over 60%, bringing the most advanced and the broadest portfolio of server and storage, global service and management software to the market. These are the investments that will power the new SuperMicro three point zero. SuperMicro three point zero positions us as the fastest growing Tier one IT infrastructure provider capable of delivering first to market product innovations in a global scale with quality management software, on-site service global and support to engage our rapidly growing enterprise customer base. The record high revenue and strong second half growth rate is a direct result of Shipu Micro three point zero investments. With the major fundamentals in place and the new Skydex product portfolio shipping.

Future investment and expense will begin to flat out, driven improved profitability moving forward. The new foundation of Super Micro three point zero has three production locations worldwide, totaling almost 3,000,000 square feet with eight production buildings, including dedicated rack level integration, configuration and validation. Combined, this capacity can support annual revenue up to $5,000,000,000 on hardware alone. In 2017, we shipped approximately 1,200,000 server storage nodes in system and subsystems based on leading analyst estimates. This volume is about 10% of the total number of system shipped in the world.

Under ChipotMango three point zero, our direct business in large enterprise, data center, storage and deep learning is expanding rapidly. We are seeing significant more engagement with large enterprise customer than ever before from Fortune 100 companies in technology, social media, major retailers, news media, cable companies and Internet retails. We are engaging earlier for technology optimization and providing more total solution, which including completed systems, software integration, quality validation, solution optimization, data center management software and global on-site service. Our channel strategy has also evolved under SuperMicro three point zero. We are working more closely with the channel and with their end user to provide solutions that drive demand to our partner.

Channel accounts for 46.3% of our revenue, and we are becoming a more strategic vendor to those channel partners through sales of computer systems, which contributed to the growth of total system revenue of 74.3% over the quarter. Under Xiboo Micro three point zero, we also continue to invest in new product lines to enhance our industry leading solutions, including our complete line of over 100 new X11 system model based on the recently launched Intel Geom scalable processor. Our big twin, people play NVMe storage systems and AI and deep learning solutions have been optimized to deliver the highest performance and efficiency from the new Intel processor and that is the NVMe innovations, especially all flash and hybrid NVMe solutions. We have seen a major design win for our new 2U4NOR between offering in both the service provider and as well as the major storage OEMs. The advanced feature of our 2U24MVME system secure a large scale deployment at a major financial service company.

And we have seen triple digit growth in our GPU and AI deep learning system scale system sales. We continue to be the leader in NVMe technology, and our ramp of NVMe sales is growing dramatically. We secured several new major data center wins and interest from specific robotics, such as autonomous driving based on our NVMe competitive advantages. NVMe storage deliver orders of magnitude, better performance than traditional solutions. And we have over 80 optimized designs available in variety of configurations, including 2U system capable of delivering 16,000,000 IOPS, which is one of the highest performance systems in the whole industry.

Our global service and management software are critical factors for SuperMango three point zero. They provide a Tier one experience for our server and storage portfolio. They create a stronger and deeper relationship with our customers. Our service team work hand in hand with our enterprise customer to deploy the highest performing and most efficient data center in the world. Our software tools are tightly integrated into the customer environment and tool set.

We achieved $50,000,000 of billings from global service and management software in 2017. That is nearly double from the last year, and we will continue to double yearly moving forward with the higher margin and amortized revenue model driven increased profitability over time. Looking forward, the combination of new Intel Xeon scalable process and the advance in NVMe products make this technology transition cycle one of the most significant opportunity for our customers in overall ticket. Along with SuperMango three point zero, we have the foundation, the product and a strong pipeline to take maximum advantage of this technology transition. We believe that fiscal year twenty eighteen will be one of the strongest year in Super Micro's history.

For more specifics on the first quarter, let me turn it over to Hal.

Speaker 3

Thank you, Charles, and good afternoon, everyone. I will focus my remarks on earnings, gross margins, operating expenses and similar items on a non GAAP basis, which reflects adjustments to exclude stock compensation expenses. Reconciliation of GAAP to non GAAP is included in the financial statements of the company in today's earnings release and in the supplemental details in the slide presentation and prepared remarks accompanying this conference call. Let me begin with a review of the fourth quarter income statement. We ended fiscal year twenty seventeen with a record $717,900,000 in revenues for the fourth quarter and executing on a number of strategic investments, which put us in very strong position as this technology recycle begins.

The investments across a number of market verticals and geographies around the world have expanded our business opportunities with a host of new and exciting existing customers, especially in large enterprise. The increase in revenues of 36.9% from last year was widespread across our market verticals such as enterprise, storage, IoT and accelerated computing. This was offset in part by a decline in IDC. On a geographical basis, we had strong growth in Asia, Europe and The U. S.

The 13.7% sequential increase in revenues was primarily driven by strength in Asia. In particular, China was up 35% as we leveraged our growing partnerships. Non GAAP gross margin was 13.5%, down 60 basis points from 14.1% a year ago and down 50 basis points from 14% sequentially. The decrease from prior year and sequentially was primarily due to cost increases in memory and SSD. Higher sales in Asia, which is typically more competitive, and sales of later stage life cycle products also affected margins.

Offsetting these were operational efficiencies, which we have made over the past few years through capacity utilization, economies of scale, more complete solution sales with higher content of software and services. Non GAAP operating margin was 4.5%, up 1.4% from 3.1% a year ago and 20 basis points from 4.3% sequentially. The increase from prior year and sequentially were primarily due to the growing revenue at a faster pace than our operating expenses. This year, we plan to tighten our headcount and expense control with the goal of continuing to leverage the investments we have already made and drive improved profitability. Net income was $20,700,000 up 100.2% from $10,400,000 a year ago and up 2.1% from $20,300,000 sequentially.

On a non GAAP basis, fully diluted EPS was $0.39 per share, which was up from $0.20 per share a year ago and up from $0.38 per share sequentially. The number of fully diluted shares used in the fourth quarter was $53,000,000 Turning to free cash flow on a sequential basis. Cash and cash equivalents short- and long term investments were 115,900,000.0 up 5,400,000 from $110,500,000 in the prior quarter. In the fourth quarter, free cash flow was a negative $12,300,000 primarily due to an increase in AR of $92,100,000 offset in part by a decrease in inventory, net of accounts payable of $40,900,000 The increase in AR was primarily due to higher revenues, which accelerated late in the quarter. Overall, cash conversion cycle days was 95, which is five days lower than the prior quarter and four days higher than the same quarter last year.

We do expect the SSD and memory issues to last through the end of the calendar year. Now for a few comments on our outlook. As we enter the 2018, we see strong growth opportunities from a technology refresh cycle, which is just starting. We continue to see strong traction for our leading solutions in our growing customer base, especially in large enterprise. These factors, coupled with the investments we have made in our future during the past few years, give us strong momentum to accelerate our growth in the many market verticals we serve as exhibited by last quarter's results.

Therefore, the company currently expects net sales for the quarter ending September 3037 in a range of $625,000,000 to $685,000,000 Assuming this revenue range, the company expects non GAAP earnings per diluted share of approximately $0.30 to $0.40 for the quarter. At the midpoint, this will represent an increase of 24% in revenue and 9% in EPS from the prior year. We continue to expect to reach the 3,000,000,000 run rate by the end of the calendar year. It is currently expected that the outlook will not be updated until the release of the company's next quarterly earnings announcement. Notwithstanding subsequent developments, however, the company may update the outlook or any portion thereof at any time.

With that, let me turn it back to Charles for some closing remarks.

Speaker 2

Thank you, Howard. We finished fiscal year twenty seventeen with record revenue and strong momentum. Jupyter Micro three point zero provides the foundation and product to take advantage of this cycle of technology transition. We believe that fiscal twenty eighteen will be one of the strongest year in Shipu Micro's history. Operator, at this moment, we are ready for questions.

Speaker 1

Operator, we're ready for questions.

Speaker 0

Thank you. And we'll take our first question from Hosseini with Susquehanna Financial Group.

Speaker 4

Hi, thanks. This is David Ryzhik for Mehdi. Just a few if I can. The midpoint of your revenue guide comes out to around down 9% Q over Q. Just wondering what are the factors particularly given that you're entering the product cycle and I'd assume that it would be ramping in the September?

And I had a follow-up. Thanks.

Speaker 3

Yes, David, this is Howard. Yes, we are seeing the ramp up as Skylake has launched here. Again, TEVRACOR is seasonally soft and this guidance is above seasonal averages.

Speaker 4

Got it. Thanks. And regarding gross margins, if memory pricing was a 50 to 70 basis point hit and I assume it was 70 basis points that would have put your gross margins at 14.2. Given the in the June, given the high volume, the favorable mix from a lower Internet data center, just would have thought that the normalized gross margins would have been higher perhaps from capacity utilization. Can you just talk about what are the other impacts?

I mean you mentioned Asia business. Can you just elaborate a little bit more on some of the mix and if there's any kind of pricing impact that we should be aware of in gross margins? Thanks.

Speaker 2

Yes. Last quarter, indeed, Memory and Flash price grew more than 20%. And this quarter, although, we have seen improvement, may grow 10%, for example, for the whole quarter, I hope. So the price is still high. And that's why we try to be conservative because for memory, for flash, there are still some unknown factor.

Speaker 3

And David, I'd just add to what Charles was saying with regards to that. Again, we are at the end of the technology refresh cycle and coming into a brand new technology refresh cycle. So typically, at the end of the cycle, the pricing gets a little bit more less on the older technology.

Speaker 4

And so I guess the follow-up would be should we expect given that you're entering the product cycle, the favorable margin impact, should we expect Q over Q increase in gross margins?

Speaker 3

Yes. Think the ramp for the products like we talked before is probably going to be towards the December. Usually takes about two quarters to ramp the production to the new chipset.

Speaker 4

Great. Thanks so much.

Speaker 0

And we'll move to our next question from Aaron Rakers with Stifel. Please go ahead.

Speaker 5

Great. This is Joe Quatrocchi on for Aaron. Thanks for taking the questions. Just want to go back to the September quarter guide and talking about that it is above seasonal and then Skylake's going be more of a kind of December story or ramp. What's the kind of outlined driver for the September guide?

Speaker 3

Well, I think we talked about a number of new engagements and new customers that we're bringing on board. So the pipeline is very strong.

Speaker 5

Okay. Maybe can you talk a little bit about the growth you're seeing in China? What's driving that? Is it the Fiber Home partnership or something else?

Speaker 2

Yes. Our business in China continue very strong. And we see we continue to gain a major partner, I mean, especially large corporate. And that trend will continue.

Speaker 5

Okay. Thanks. And then just a quick follow-up on the gross margin. I don't think maybe I misheard the manufacturing utilization this quarter. And then I mean do you think this could be the bottom of gross margin as we kind of work through some of these memory cost increases?

Speaker 2

Basically, you hope so.

Speaker 6

Okay. Thanks.

Speaker 0

And we'll take our next question from Brian Alger with ROTH Capital Partners.

Speaker 6

Hi guys, good afternoon. Congrats on a good finish to the year. Obviously, bit challenging with memory, congrats on the loss. As you look in the full year out and you've talked about Super Micro three point zero, is there this diversification that you're now enjoying, is there a new focus for the company? Or is diversification really the name of the game as we look going forward?

Speaker 2

Indeed, as you may know, we invest a lot. Like in the last three years, we grew 60% engineering manpower. That's why we are able to implement our global service team, and we are able to make our server storage, data center management software completely ready. So with all those ready, I mean, we are able to continue to gain enterprise customer. Indeed, the last twelve months, we won more than 15 large enterprise customer.

And this year, we believe we will accelerate the large enterprise customer gaming.

Speaker 6

Fantastic. That

Speaker 2

means we are truly ready function like two Tier one companies with product advantage and with complete solution including service.

Speaker 6

Great. And I guess maybe a technical question. Obviously, storage was a really strong performer in this past quarter, up significantly both year on year as well as sequentially. In the past, historical Super Micro, you guys used to ship a lot of JBODs basically. Now you guys have a very strong NVMe product portfolio.

And I'm curious as to how much of your storage solutions these days are solid state as opposed to rotational?

Speaker 2

Indeed, last year, the whole year, we grew about 30% in our storage system overall. And looking forward, we will continue to have a strong growth in storage, especially NVMe base.

Speaker 6

Is there a margin difference if we normalize availability of NAND and DRAM? Howard, is there a significant difference in terms of the gross margins that you guys can generate with these NVMe systems as opposed you know, the JBOD systems that you were shipping previously?

Speaker 2

Basically, NVMe, new technology, we supposed to have a much better profit margin. However, the shortage the shortage. And then at the same time, we need a much more volume because we are faster growing. So in that case, we had to pay a premium to gain more volume. That's why margin was low.

Speaker 6

Understood. Okay, thanks again and congrats on the finish to the year.

Speaker 2

Thank you. Thanks.

Speaker 0

We'll move to our next question from Nehal Chokshi with Maxim Group. Please go ahead.

Speaker 7

Thank you. Two part question here. So first, memory and NAND flash price increases for the quarter. How much was it to you guys on a Q over Q basis?

Speaker 3

Well, as Charles mentioned earlier, we saw price increases around 20%. Within the commentary, I said that it had about 50 bps to 70 bps impact to our gross margin.

Speaker 7

Okay. And so I guess there's some customers that did not accept price increases or you had an existing fixed price contract. And what I'm trying to get is that there must have been some percent of customers that didn't accept that. And A, what is that percent? And then B, it seems like given the incremental revenue and then there was actually negative incremental EPS is from what I can tell that this was actually a negative incremental gross margin business because they didn't accept the increased price.

So B, is that correct? And then if that is correct, why honor that contract?

Speaker 3

Again, the contract was in place and it's expiring, it's been renegotiated. So again, we had contracts there and it was terminated. But again, the volume went up and it did hurt us a bit, as we mentioned earlier in our press releases. But it's been recognized.

Speaker 7

Okay. If I may, I'd like another follow-up question, just a different topic. The ASP per server really took off. It was up 43% year over year and 13% Q over Q. What's behind this significant increase?

Speaker 3

Well, think, like I said, we're getting to more full boxes now. As Charles mentioned, we're building our breadth into the large enterprise type customers, data center customers, taking full boxes. Previously, if you remember, our server solutions category had everything from bare bones to complete server solutions. So we're now moving more into complete server solutions, including software and support services.

Speaker 7

Okay. Thank you. I'll move back into the queue.

Speaker 0

And we'll take our next question from Alex Kurtz with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Hey guys, can you hear me okay?

Speaker 3

We can Alex.

Speaker 8

Great. So just on some numbers here, what was the utilization rate in the quarter? And what was the emerging growth the emerging storage growth rate?

Speaker 3

Yes. Before the quarter, Alex, was about 60% on utilization.

Speaker 9

Yes. In the Let emerging storage

Speaker 3

me get back to you on that question.

Speaker 8

Okay. My question for you guys is just taking a deeper look here at the data center business. Obviously, IBM was a tough comp in fiscal twenty seventeen. But even if you, I think, exclude IBM out of the data center number, it was down this year in fiscal twenty seventeen. Historically, IDC business has been a good business for you guys.

So what's going on there? Even if you exclude IBM, it looks like things were down. Can this business can the IDC business grow in fiscal twenty eighteen at the same growth rate as the rest of the business?

Speaker 2

Yes, indeed, in last year, including last quarter, the major challenge to us was not in our memory, not just the price is high, but in those case, we had to wait for memory. So there's no enough memory and some PR we had to wait for fresh. So that kind of impact, that's why we have less IPC, Internet Data Center business, especially.

Speaker 8

So memory specifically held up projects, Charles, is that right?

Speaker 2

Your question again?

Speaker 8

So memory impacted your ability to deliver on some opportunities in the IDC space. Is that what you're saying?

Speaker 2

Part of the reason, but also because memory price is so high. And as you know, Internet data center profit margin are basically more limited. That's why we have the best win in that area.

Speaker 8

And just last question for Howard. I can get the storage number later. But what would stop you from getting back to like a 15% plus gross margin exiting fiscal twenty eighteen, Howard, assuming that memory does play out the way you think it does and you have Skylight kicking in, which always is helpful for you. So why can't investors think about a 15% plus kind of gross margin exiting fiscal twenty eighteen if all those things were to come together?

Speaker 3

I think like we've talked about here, Alex, we've got a number of investors who are going be leveraging our investments, being better on our operational efficiencies and operating expenses. So obviously, there are a lot of opportunities for us to grow that margin through this year, especially with the refresh cycle coming. With regards to just sort back on the next gen, was about And

Speaker 0

76% year over year

Speaker 8

you guys still feel that you did have that one vendor that was acquired by a larger OEM and that hasn't impacted your emerging storage business yet?

Speaker 9

Or it No, hasn't

Speaker 3

it hasn't and probably will provide us with great opportunities going forward as well.

Speaker 8

To work with that OEM that acquired that company? Correct.

Speaker 9

Okay. All right.

Speaker 3

Thank you.

Speaker 8

Great. Thank you.

Speaker 0

We'll take our next question from Nehal Chokshi with Maxim Group. Please go ahead.

Speaker 7

Yes, thanks. One quick keeping question. Number of subsystem units?

Speaker 3

Number of subsystem units was 1,014,000.

Speaker 7

Okay. Thank you. And then of the 15 new large scale enterprise customers in fiscal year twenty seventeen, how many of them began in this quarter?

Speaker 3

Can you say that again, Michal? Sorry.

Speaker 7

So in the presentation, there was a statement that there was 15 new large scale enterprise customers during fiscal year 'seventeen. I'm wondering how many of those actually started deployments within this June?

Speaker 2

Indeed, all of them started to implement in last year and around half of them started to move on June. But because it's new, that's why the first deployment is not that big, but kind of relatively very good size, though.

Speaker 7

And so effectively, think there was like 170% Q o Q increase in the enterprise revenue. Was that because of all these new large scale customers? Or was it because you had significant expands from the large scale customers?

Speaker 2

I believe majority from the new enterprise customer.

Speaker 7

Okay. And then for those that did become Super Micro customers at the beginning of the fiscal year, how has the cadence of orders been from those large scale customers?

Speaker 3

Certainly, the opportunities are there, and we're going to be as we said earlier, the pipeline is very good for us.

Speaker 7

Okay, great. Congratulations. It's very encouraging.

Speaker 2

Yes. Last year, we won, I believe, more than 15 large enterprise customers. This year, we foresee at least win another 25 or 30.

Speaker 7

Great. Thank you.

Speaker 0

We'll take our next question from Mehdi Hosseini with Susquehanna Financial Group. Please go ahead.

Speaker 4

Hi, thanks. This is David Ryzhik again for Mehdi. Just to clarify, what percent of total revenue in the June did Enterprise make up? And just given your target of adding 30 new customers in fiscal twenty eighteen, do you have a target of what percentage Enterprise can make up of total revenue exiting the fiscal year?

Speaker 3

Yes. For the quarter, David, it was about 8% of total revenues.

Speaker 4

Great. And do you have a target exiting 2018?

Speaker 3

We haven't put a target out there. Certainly, have plenty of opportunities. I hope that it to be tabooed, right? Tabooed.

Speaker 4

Yes. Great. And just related to that, how can we think about OpEx for fiscal twenty eighteen? You do have an aggressive strategy to add onboard these new customers. I would assume that would require some investment.

Yet in your slide deck you talked about that leveling off. Just how can we think about the quarterly OpEx as moving through fiscal twenty eighteen?

Speaker 2

Yes. As in the chart that we shared with you, last three years, we grew about four fifty engineers just to enable SuperMemo three point zero. And pretty much that whole program already established. So looking forward, we don't have to invest extra don't have to invest much extra investment.

Speaker 4

Got it. And so I guess so no real need to invest in sales and marketing capacity to onboard additional enterprise customers? Or you feel like you have what you need?

Speaker 2

Pretty much ready. We do hire more, we'll be limited.

Speaker 4

Got it.

Speaker 3

Thank

Speaker 4

you. Thank

Speaker 0

And we'll take our next question from Aaron Rakers with Stifel. Please go ahead.

Speaker 9

Yes, thanks for taking the questions and I apologize for kind of joining a little bit late. Maybe some housekeeping things first. How should we think about the progression of the tax rate?

Speaker 3

In the prepared remarks and this is a new concept for us a bit, Aaron, so if you look on the website, you'll see some prepared remarks for us. It'll say that we do have a guide for this quarter of about 34% on the tax rate.

Speaker 9

Yes. And I guess I was asking more beyond that. I mean, it's been somewhat volatile quarter by quarter over the last few quarters. So understanding it's somewhat driven by the international mix, etcetera. But again, I think it would be helpful to understand with some of the taxing that you've done over the last few quarters, what should we be thinking about the progression?

Where do you think a normalized tax rate kind of falls out for the company?

Speaker 3

Well, I think certainly it gets better for us as we go further offshore and increase our foreign presence. At this point, we're guiding 34% for the quarter.

Speaker 9

Okay. Fair enough. If you didn't have the constraints this last quarter on DRAM and it sounds like maybe a little bit of flash or SSDs as well. What do you think your revenue could have been? Was that a $20,000,000 impact, dollars 30,000,000, dollars 50,000,000?

I'm just kind of trying to frame how constrained you are in terms of fulfilling you know, the potential incremental revenue.

Speaker 2

Indeed, it's not small.

Speaker 9

I missed that. Was that a lot more?

Speaker 3

It was more than small. Eric, I think we've done a very good job of managing this, going through the process of managing this. And so quite frankly, we're delivering orders and doing it. We saw some acceleration at the end of the quarter. But again, we've done a pretty good job of managing the SSD and memory shortage.

Speaker 9

Okay. How strategic inventory on memory and SSDs are you carrying coming out of this quarter? I think last quarter you talked about kind of $63,000,000 of excess inventory.

Speaker 3

It's similar to that.

Speaker 9

It's similar to that. Your current view of when things kind of get back to normal, where you're executing in a quarter that there is no supply constraints, when would you expect that to be?

Speaker 3

Yeah, haven't forecasted that per se. Said all the good.

Speaker 2

Basically, the memory and flash shortage program will be getting better from now on, I believe. So by December, I believe we will see some significant improvement.

Speaker 9

Okay. And then the final question, and I'm sorry to go back to it, but the enterprise business growing as much as it is pretty remarkable. As that grows and becomes a larger potential piece of your overall business, how do we think about the margin profile of that vertical relative to the margin of your overall business today, say relative to the 13.5% growth? I'm just trying to understand how we should think about that given what should be a positive mix of software, maybe services that are wrapped around that traditional enterprise customer base.

Speaker 2

Yes. Basically, enterprise customer are more picky for quality for solution. So the margin will be slightly better at least.

Speaker 9

Any is it 200 basis points?

Speaker 3

We haven't quantified that, Aaron. It's going to be better.

Speaker 9

Okay. Fair enough. Thank you very much.

Speaker 0

And that does conclude today's question and answer session. Mr. Liang, at this time, I'd like to turn the conference back to you for any or closing remarks.

Speaker 2

Thank you for joining us today, and we look forward to talking to you again at the end of this quarter. Thank you, everyone. Have a great one.

Speaker 0

And this concludes today's call. Thank you for your participation. You may now disconnect.