On Tuesday, Super Micro Computer (NASDAQ:SMCI) discussed third-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://events.q4inc.com/attendee/464075960
Summary
Leverage Shares PLC reported significant growth in business value, driven by technology leadership and market expansion, despite industry-wide shortages impacting revenue.
The company achieved a gross margin recovery to 10.1%, a 58% increase from the previous quarter, and aims to maintain a sustainable double-digit gross margin model.
Leverage Shares PLC highlighted the expansion of their Data Center Building Block Solutions (DCBBS) and software, expecting this to significantly contribute to future profitability.
Strategic initiatives include strengthening the Global Trade Compliance program and expanding manufacturing footprint in the U.S. and globally.
Future guidance reflects an optimistic outlook with expected Q4 revenue of $11-12.5 billion and a full-year target of $40 billion, indicating confidence in overcoming current challenges.
Full Transcript
OPERATOR
Thank you for standing by. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Super Micro Computer Inc. Third quarter 2026 earnings call. With us today are Charles Liang, Founder, President and Chief Executive Officer David Wiegand, Chief Financial Officer and Michael Sager, Senior Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press Star followed by the number one on your telephone keypad and if you'd like to withdraw your question again, press Star one. Thank you. I would now like to turn the conference over to Michael Sager. Please go ahead.
Michael Sager (Senior Vice President of Corporate Development)
Hey, Good afternoon. Thank you for attending Super Micro call to discuss financial results for third quarter fiscal 2026 which ended March 31, 2026. As you know, with me today are Charles Liang, Founder, Chairman and Chief Executive Officer David Wiegand, Chief Financial Officer. 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. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the Company's website under the Events and Presentations tab. We also publish 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, future Business Outlook, including guidance for the fourth quarter fiscal year 2026 and the full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause the actual results or even events to materially differ from those anticipated and you should not place undue reliance on forward looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier today, Our most recent 10k filing for fiscal 25 and other SEC filings. All these documents are available on the IR page of Supermicro's website. We assume no obligation to update any forward looking statements. Most of today's presentation refer to non GAAP Financial Results and Business Outlook. For an explanation of our non GAAP financial measures, please refer to the Company presentation or to our press release published earlier today. The non GAAP measures are presented as we believe that provide investors with a means of evaluating and understanding how management's evaluates the company's operating performance. These non GAAP measures should not be considered in isolation from, as substitute for or superior to financial measures prepared in accordance with US gaap. In addition, a reconciliation of GAAP to non GAAP results contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q and A session for sell side analysts for fourth quarter fiscal 2026. Quiet period begins at the close of business Friday, June 12, 2026 and for now I will turn the call over
Charles Liang (Founder, President and Chief Executive Officer)
to Charles thank you Michael and thank you all for joining today's call. We had significant business value growth with our technology leadership and market expansion. However, before I discuss the specific of the quarter, I want to provide an update on a recent development regarding the indictment of certain individuals formerly associated with the company. I must be clear, Super Micro is not a defendant nor a target or a grand jury investigation and Super Micro had zero tolerance to any employee who violated fatal law and regulation. I am personally shocked and saddened by these allergic actions which in no way represented the value or ethics of this company. We took immediate action by terminating our relationship with the defendants and helping and cooperate fully with the US Government. Additionally, our independent directors have launched a thorough independent investigation with cut forensic and legal forms to ensure we continue to maintain the highest standard of integrity. We are not waiting for this process to finish. We are further strengthening our Global Trade Compliance program under expert leadership. Not only is Chibumica fully committed to protecting advanced American technology and following the highest and business standard, but continue to expand our manufacturing footprint right here in United States. Again, the alleged actions of few individuals do not define us. Our focus remains on doing extraordinary work for our customer and partner and leading the industry with transparency and excellence. Now let's talk about a quota. This was a quarter defined by value and focus for Shibu Micro. Despite the industry wide shortage of key components including cpu, GPU and memory, our business continues to grow and expand. Indeed, our back order is now in another record high. We advance and optimize the orders data center infrastructure using our leading direct liquid cooling Direct Liquid Cooling (DLC) technology. Our focus remains on delivering the fastest time to online Time to Online (TTO) in the industry, ensuring our customers can scale their AI factories quickly and most efficient. While our fiscal Q3 revenue of 10.2 billion was impacted by customers site readiness delay, our business fundamentals are stronger than ever. This is purely a short term delay. Several customer side were not yet equipped with the power and networking required for their cloud deployment and we expect to capture this revenue in the coming quarters. One of the most significant achievements this quarter was our gross margin recovery which increased significantly to 10.1% non-GAAP representing a 58% improvement over the 6.4% non GAAP reported in the previous quarter. We are committed to achieving a sustainable double digital gross margin model by increasing our focus on enterprise market and our CCPPS business. Here are some key growth drivers. First, market strength business remains very strong in the near cloud solving AI and authentic AI segment. We have been aggressively fostering the traditional enterprise and storage business for about one year and we start to see strong growth Growing Opportunities Our Data center building block solution DC BBs continue to attract old and new customers, interest and create new popular streams. By offering a total data center solution that includes complete degree cooling for facility management, software, networking and service. We are providing much more value to our customers as they commit to our total solutions product mix and efficiency. We improve our product mix with some more unique value product in this quarter and thereafter. We also advance our design of manufacturing, EFN and more automation in our factories to build products faster with higher era and quality and supply chain. We successfully manage inventory through a dynamic supply environment and took actions to reduce tariff related cost operation. These efforts help improve flexibility of tax margin and support customer delivery timeline. Here is the bigger story. Supermico is evolving former US based server designer and manufacturer into a total data center solution provider. We expand our business to have customer planning, building, deploying and servicing data center infrastructure for global enterprise and new cloud provider. Especially our PCPPS business is essential to this transformation, providing almost everything a customer needs to to build an AI factory including cooling units, networking, PowerShell battery, backup management software and many other data center subsystems. Our DCPPS business continues to grow exactly as what we plan, showing a consistent and accelerating contribution to our top line and bottom line quarter over quarter and I believe our TCPPAS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years we have consistently turn industry disruption into innovation and new strong opportunities. One of the key value and drivers of our TCPBS business is our data center end to end management software. We see significant demand for the shipumicro data center and cloud software suite including our Super Cloud Composer that manage tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage, cooling status, safety condition and device utilization alongside many other critical features management software feature also include advanced CPU and GPU workload orchestration which is a critical function for today's AI data center. The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarters ago to 34 million last quarter and more than $46 million books for this quarter. By bundling subscription based software and service alongside our hardware, we are strengthening our customer relationship and improving our long term profitability. We expect DCBBs including software and service to continue its rapid growth and to become a major part of our key value very soon. We continue to grow and expand our partnership with many key suppliers, especially with Nvidia. We are currently shipping many SKU oil rack scale systems including GP300MV LR72, many B300HGX SKU B200MV LR4 and inferencing application optimized RTX product lines and we are preparing to be among the first to market with the new Vera Lubin Systems including the MVL72 Supercast. We continue to build on strong momentum of our AMD Mi350 platform as we prepare for the next generation of AMD helios solutions featuring APEC, Venus and Mi 400 series our products. In addition, we are working closely with intel and ARM on the development of upcoming Geom 6+ platforms and a new addition to our portfolio including ARM AGI GPU based solutions. This system will deliver exceptional performance per watt, specifically optimum for our growing demand of agentic AI workloads. By leveraging shipment code system building block solution, RAC and data center scale building block architecture, we can efficiently support a wide variety of compute platform and optimize them for different business verticals. Moving on to our footprint, we are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia and NEZER are all ramping up aggressively domestically. We recently announced our largest US site to date, a new DC BBS campus in Silicon Valley just one mile away from our headquarters. This brings our total Bay Area footprint to nearly 4 million square feet featuring eight new buildings optimized for innovation, design, production and validation or next generation end to end data center total solutions. Within this new campus we are building multiple large scale validation and production facilities, some of them including Clean Room specifically to Support our new DLC 2 subsystem and next generation networking solutions including advanced optical photonics based devices. With these expansions we are on track to produce more than 6,000 or award's most powerful state of the art rack for months. In closing, Shibu Mango continues to scale out revenue and scale up value. We have strengthened our governance delivering a meaningful margin Recovery and expanded DCPPAs growing in both volume and value through software, networking service and more. Our leadership in DLLC technology pair our ability to deliver large scale total solution and industries fastest time to online. We are continuing to fuel our strong growth keeping Chupamanga at the center for our AI revolution. With that I remain very bullish about our growth in the AI and data center market. For the first quarter we target $12 billion given stable supply Confucius for the full year we target $40 billion. I will turn this over to David
David Wiegand (Chief Financial Officer)
thank you Charles Fiscal Q3FY26 revenue was 10.2 billion, up 123% year over year and down 19% quarter over quarter. As Charles mentioned, Q3 revenue was impacted by data center and customer readiness together with industry wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remain strong across our customer base driven by AI infrastructure demand with AI GPU related platforms contributing over 80% of revenue. During Q3, the enterprise channel revenue totaled 2.8 billion, representing about 28% of revenue versus 15% in the prior quarter. This was up 46% year over year and up 45% quarter over quarter. The OEM appliance and large data center Segment revenue was 7.4 billion, representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year over year and down 31% quarter over quarter. For Q3 FY26, we had two existing customers each representing more than 10% of revenues, one large data center customer at 27% of revenues and one enterprise customer at 10% of revenues. By geography, the U.S. represented 69% of Q3 revenue, Asia 13%, Europe 7% and Rest of World 11%. On a year over year basis, U.S. revenue increased 154%, Asia grew 1%, Europe grew 146% and the Rest of World increased nearly 500%. On a quarter over quarter basis, U.S. revenue decreased 36%, Asia increased 17%, Europe increased 105% and the Rest of the World increased 392%. The Q3 non GAAP gross margin was 10.1%, up from 6.4% in Q2. Gross margins were ahead of expectations driven by our customer and product mix together with lower tariffs, expedite and inventory reserve charges. Q3 GAAP operating expenses were 393 million which was up 34% year over year and up 21% quarter over quarter on a non GAAP basis. Operating expenses were 278 million up 29% year over year and up 16% quarter over quarter. Both GAAP and non GAAP operating expenses were up quarter quarter over quarter due to higher headcount related expenses. Non GAAP operating margin for Q3 was 7.3% compared to 4.5% in Q2. Other income and expense for Q3 totaled a net expense of 15 million reflecting 49 million in interest and other income offset by 64 million in interest expense related to convertible notes and the revolving credit facilities. The tax provision for Q3 was 127 million on a GAAP basis and 156 million on a non GAAP basis, resulting in a GAAP tax rate of 20.8% and a non GAAP tax rate of 21.1%. The Q3 GAAP diluted earnings per share was $0.72 compared to guidance of at least 52% $0.52 and non GAAP diluted EPS was $0.84 versus guidance of at least $0.60 due to higher gross margins. The GAAP fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3 while the non GAAP share count was largely flat at 709 million in Q3 compared to Q2. Cash flow used in operations for Q3 was 6.6 billion compared to 24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of 581 million. These factors were only partially offset by higher net income and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was 11.1 billion, up from 10.6 billion in Q2. Capex for Q3 totaled 80 million, resulting in negative free cash flow of 6.7 billion for the quarter. At quarter end our cash position totaled 1.3 billion. Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible Note debt was 8.8 billion, resulting in a net debt position of 7.5 billion compared to a net debt position of 787 million in the prior quarter. In addition to using our existing US Revolving credit facility and non recourse AR sale facility, we set up and commenced usage of a $1.8 billion Taiwan revolving credit Facility to further support working capital requirements. Turning to the balance sheet and working capital metrics, the cash conversion Cycle increased from 54 days in Q2 to 106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter. Days sales outstanding increased by 36 days to 85 days versus 49 days in Q2, while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2. Now turning to the outlook for Q4 fiscal year 26 which ends June 30, 2026. We expect net sales in the range of 11 billion to 12.5 billion. We expect GAAP diluted net income per share of $0.53 to $0.67 and non GAAP diluted net income per Share of $0.65 to $0.79. We expect gross margins to be in the range of 8.2 to 8.4% based on expected customer mix. GAAP operating expenses are expected to be around 433 million, which include approximately 114 million in stock based compensation expenses that are excluded from non GAAP operating expenses. The outlook for Q4 of fiscal year 2026 fully diluted GAAP earnings per share includes approximately 95 million in expected stock based compensation expenses and net of tax effects of 30 million which are excluded from from non GAAP diluted net income per common share. We expect other income and expenses, including interest expense to result in a net expense of approximately 36 million. The company's projections for Q4 fiscal year 26 GAAP and non GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non GAAP tax rate of 20.4% and and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non GAAP. Capital expenditures for Q4 are expected to be in the range of 30 to 50 million. For the full fiscal year 2026, we expect net sales to be in the range of 38.9 billion to 40.4 billion. Michael, we're now ready for Q and A.
Michael Sager (Senior Vice President of Corporate Development)
Great. Before we begin Q and A, I just like to remind everyone that the purpose of this call is to discuss our third quarter fiscal 2026. As such, we ask that you focus your questions on the results we announced today. Thank you in advance. And Krista, let's begin.
Krista (Operator)
Thank you. If you would like to ask a question, please press Star one on your Telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question again, press star one. We kindly ask that you limit yourself to one question and one follow up. For any additional questions, please re queue. And your first question comes from Ananda Baruha with Loop Capital. Please go ahead.
Ananda Baruha (Equity Analyst at Loop Capital)
Yeah, guys, thanks for taking the question and congrats on the progress with the gross margin. It's great to see that. Yeah, a couple, if I could, I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout sort of during the quarter. I guess specifically, could you give us an update on the indictment? Any more insight to any company employee involvement? Do you think you'll have to restate earnings? Are you on track to file your 10Q, things like that? And then I guess part and parcel with that on the board investigation that you guys announced, if you could talk to the opportunity that that could have to strengthen the organization, you know, sort of, and what those, what those opportunities might be, that would be awesome. And then I have a quick follow up. Thanks a lot.
Charles Liang (Founder, President and Chief Executive Officer)
Okay, thanks Ananda. So the company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced, we're taking this matter seriously. The alleged conduct would violate our export control policies and procedures and we're fully cooperating with the US Government to address this situation. In addition, our independent directors have retained an outside law firm, Munger, Tolles and Olson, and a forensic firm, Alex Partners, to conduct an independent investigation into these events. The investigations are ongoing and we can't give you any final information at this time. So based on what we know so far though, that could change as the investigation progresses. No one from the company other than those named in the DOJ indictment was involved. As to your second question on restatement of earnings, based on everything we know at this moment, and considering the independent investigation is ongoing, we do not believe we will need to restate. And lastly on the, on the 10Q again, the Independent investigation is ongoing and any filing will be subject to BDO review. Based on what we know at this moment, we are planning to file our 10Q and are preparing accordingly. And I think your, your last comment about, you know, certainly we will be taking to heart the results of the independent investigation and we will look at that as an opportunity to grow and strengthen.
Ananda Baruha (Equity Analyst at Loop Capital)
Thanks for that context and I guess my follow up would be sort of dovetailing off of that. You guys are probably aware Sort of one of the top questions on investors mind is in lieu of, in lieu of these sort of aforementioned dynamics, is there potential for customers to get a little skittish and move away to other server vendors, Gen AI server vendors. So to the degree that you have any context that you could offer there, that would be greatly appreciated. And that's it for me. Thanks.
Charles Liang (Founder, President and Chief Executive Officer)
Yeah, thank you for the question. Indeed we are growing our customer base like last few quarters I share now we have many more large customer and middle sized customer and from our experience working with customer, communicate with customer, most of the customer indeed feel pretty solid to continue our business and continue to grow together. So at this moment I personally don't feel any negative feeling.
Ananda Baruha (Equity Analyst at Loop Capital)
Got it. Thanks. Thank you for the context. I really appreciate all that. Thanks.
Krista (Operator)
Your next question comes from the line of Somic Chatterjee with JP Morgan. Please go ahead.
MP
Hi, thank you for taking my question. This is MP on behalf of Somic Chatterjee. For my first one I just wanted to ask in your last call you mentioned DCBB contributions to profits during first half of about 4%. Can you please update how did it track during the quarter and how much of a driver was that relative to gross margin improvement that you saw during the quarter? And I have a follow up.
Charles Liang (Founder, President and Chief Executive Officer)
Yeah, yeah, very good question. Yeah, our DC BBS indeed continue to gain more and more attraction from old customer and new customer. So it's a very good value add to our hardware and also enhancing our relationship with the customer. So the customer who use our DCPS continue to grow and we believe this growth will continue strongly in next two years. I personally expect at least 20% of our net income will be from DCPPS including the management software.
MP
Okay, thank you. And then for my follow up I just wanted to ask on capacity additions which you've done during the quarter, can you please help us quantify the revenue capacity that it helped to add for the company?
Charles Liang (Founder, President and Chief Executive Officer)
Thank you. Yeah, also very good question. Again our capacity now is very huge but we continue to grow our capacity because we like to make sure ourselves ready for for a new generation of data center need for our industry. For example a much higher density in power in computing density and also in photonics technology and newer generation of switch. So we are preparing all of that and some of the new facility indeed was paired with clean room. So to make sure we are able to provide injected based liquid cooling the best communication bandwidth and minimize the power consumption for a new generation data center need. So although our capacity already big, but we continue to build more capacity.
Krista (Operator)
Thank you thank you. Your next question comes from the line of Victor 2 with Raymond James. Please go ahead.
Victor
Hi guys, thanks for taking the question. I just wanted to follow up on the first question that was asked. Does the investigation, you know, around the indictment potentially impact, you know, your relationship with Nvidia, you know, subsequently, you know, your allocation or supply of GPU and other components? Because I think that's another really frequent point of concern that we get from, from clients these days is you know, how that impacts your relationship and whether or not the dynamic there has changed at all.
Charles Liang (Founder, President and Chief Executive Officer)
Our relationship with vendor have been very long time including Nvidia AMD intel programm. So at this moment we feel our partnership stay strong and if not stronger, at least as strong as before. And we continue to work together we for lots of new projects. So we also share with our vendor is some, a few employees, individuals case. So I hope there is no impact basically. David, you want to add something you would like?
David Wiegand (Chief Financial Officer)
Yeah, I mean our understanding is that there's been no change in allocation.
Victor
That's very helpful. And just a quick, just a quick follow up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now and you know, is that contributing to the margin expansion at this point? I'm sorry, could you repeat that? The investments that you've noted previously regarding engineering support services, you know, have those kind of peaked now at this point or you know, I guess, you know, where are we, you know, along progress of those investments and you know, how is that contributed to the margin dynamics going forward?
Charles Liang (Founder, President and Chief Executive Officer)
Oh yeah, I mean a very good question indeed. Our service business, including data center planning, designing or deploying or out of build up services continue to grow. So we continue to grow that service team, consulting team and revenue continue to grow. Yes. In this segment of profit is much better than our average hardware for sure. Yeah.
David Wiegand (Chief Financial Officer)
But I would, I would say that it in no ways has peaked though. I mean it's really, we're just gaining traction.
Victor
Okay, thank you.
Krista (Operator)
Your next question comes from the line of Asia Merchant with Citi. Please go ahead. Well, great.
Asia Merchant
Thanks for taking my question here. If I could just the supply constraints, there's been a lot of talk about, you know, CPU based shortages. So just the guide that you're providing, are you constrained in any components here and would there be a number, you know, if these supply issues were resolved, basically, were you constrained by supply? And then if I can squeeze in one more as well on the data center, clearly you're seeing traction here, you know, relative to where you were last quarter when it was just starting to kick through. Can you help us understand what kind of customers, if you're seeing any change in the customers, you know, whether it's from a vertical perspective or a geography perspective, are you seeing traction with these data center building block solutions? Thank you.
Charles Liang (Founder, President and Chief Executive Officer)
Yeah, thank you. Yeah. In terms of shortage, I believe it's a global common problem. So in last six months, as you know on the memory SSD price grow so much, double, triple, more than triple. And some CPU shortage, especially from intel. So. And also even some GPU shortage. Right. So we like other competitors, other system company. Yes. We suffer a lot from those shortage and those shortages may continue for we don't know how long like a memory and ssd. But we have a very good relationship with our vendor so we continue to work with them and try to again more long term support. As to our customer base. Yes. As what I shared last time, we start to gain more, many more enterprise customers globally and neo cloud. So we add more large customer and we add lots of mid size and small size customer and we will continue this direction to support more customers. Great, thank you. Thank you.
Krista (Operator)
Your next question comes from the line of Catherine Murphy with Goldman Sachs. Please go ahead.
Catherine Murphy (Equity Analyst at Goldman Sachs)
Thank you for the question. I was wondering if there was any one time items that impacted gross margins in the quarter and anything you could share there specifically to quantify. I think you mentioned tariffs, expedite fees and then inventory reserve charges. That would be helpful. And then I have a quick follow up.
David Wiegand (Chief Financial Officer)
Thank you. Sure. So with the tariffs, you know, as you know, were reduced by the Supreme Court and there were some replacement tariffs that came in. So we are hopeful that tariffs will be down net on a net basis going forward. So whether I can, whether I look at that as a temporary or ongoing thing is based on optimism. But the other thing regarding expedite fees, we had a very large deployment in our March quarter which, I'm sorry, in our December quarter which ended up incurring a lot of expedite charges. So those did not recur in the March quarter. So therefore we expect that to be incrementally up going forward. As to the, you know, the supply constraints, you know, as Charles mentioned, were it was especially troublesome in the last six months. But we expect some challenge going forward. But not like we incurred over the last six months, that was very helpful.
Catherine Murphy (Equity Analyst at Goldman Sachs)
And then in terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness and that deal was contemplated in Your prior guidance for a margin benefit that was modest quarter over quarter, was that deal that flipped or was otherwise delayed a drag on consolidated gross margins? And how should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here?
David Wiegand (Chief Financial Officer)
Yeah, so we think that some of the, some of the large deals that we talked about in the past have been incrementally beneficial to Supermicro because of our reputation, the reputation that it brings for us in deploying large scale installations to some of the best sites in the world. And so what we notice now is that we're, as Charles mentioned, we're not only getting more larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales. And so we're actually, we actually had more diversification this quarter. And we, and we see that going into the current, you know, into the June quarter as well. So we think on that basis, some of the strategic decisions that we made on large installations have been beneficial.
Krista (Operator)
Thank you. Your next question comes from the line of Ruploo Bhattacharya with Bank of America. Please go ahead.
Ruploo Bhattacharya (Equity Analyst at Bank of America)
Hi. Thanks for taking my questions. I've got two. The first one is a clarification on revenues and gross margins. David, you mentioned that there was some push out of revenue into future quarters. Can you help us quantify how much of that is coming back in, in the December quarter versus how much of how much would be in future quarters? And on the margin side, can you help us clarify how you're thinking about the margin decline from fiscal 3Q to fiscal 4Q? I think you guided 8.3% gross margin on higher 11.8 billion of revenue. So what are some of the factors impacting gross margins between fiscal 3Q and 4Q? And I have a follow up.
David Wiegand (Chief Financial Officer)
Sure. So regarding the deferred revenue, it really comes down to when the customers are ready and when their data centers are ready. Ruploo. So we're always optimistic that we can ship right away, but that sometimes depends on the customer readiness. So we have to wait and see how much lands in the June quarter and how much lands in the September quarter. As to margins, our margin mix is determined by which customers that we sell to and which products we sell. So that's really the biggest dynamic in affecting our margins. But what we, so therefore what we see is a good upward Trend to that 8.2 to 8.4 range. But it will depend on which customers ultimately we, we, we sell to.
Ruploo Bhattacharya (Equity Analyst at Bank of America)
Got it. Thanks for the details there. Can I ask A follow up on working capital. In the past when we've had GPU transitions, you've had to spend some working capital and time and money as customers qualify these new racks. So I'm thinking as Nvidia releases new GPUs and when the transition happens from the over on rack to a new Kyber rack, do you how are you thinking about your working capital needs and is there a chance that you might have to come to the capital market again to raise capital for working capital? So just your thoughts on investments required as new GPUs and new rag designs come out. Thank you.
Charles Liang (Founder, President and Chief Executive Officer)
Yeah, very good question. Basically we are diversifying our customer base and also improving our product value. Now we have more and more partnership that we not just build AI server, not just that storage, but we have customer deployment and build a whole data center with DCPS total solution. So indeed our business will be more diversified and more kind of smooth life in terms of revenue dynamic and also profit margin change. So in terms of those concerns, we are improving in a very positive direction now, quarter after quarter, basically.
David Wiegand (Chief Financial Officer)
Okay. And in terms of working capital, David, any thoughts there? Yeah. So Ruflo, what I would say is I always hope that we need to go back to the markets for more money because we grow a lot. Yeah, yeah. But if we grow more stably, our capital should be pretty enough. So it depends, it depends on how
Charles Liang (Founder, President and Chief Executive Officer)
fast our growth rate is. Ruplo.
David Wiegand (Chief Financial Officer)
Yeah. If we try to double again revenue then we may need some more help in turbo capital. But if we grow a little bit humble, then I believe we are pretty enough. Because now our business model is what is improving. Yeah.
Krista (Operator)
Your next question comes from the line of Nihal Chokshi with Northland Capital Markets. Please go ahead.
Nihal Chokshi (Equity Analyst at Northland Capital Markets)
Hey, thank you and congratulations on a strong gross margin. Charles, you mentioned that over the next two years targeting 20% to data center building block solutions. 20%?
Charles Liang (Founder, President and Chief Executive Officer)
Was that gross profit or was that revenue puffy? Got it. Okay, very good.
David Wiegand (Chief Financial Officer)
And I can't remember David or Charles, you gave a percentage or a dollar number of DC DBs in the quarter and a quarter ago period. Could you just repeat that again real quickly? We didn't, we didn't give that percentage out Naho, but our gross margin did increase on our data center sales. But we, I don't have the percentage of our gross profit that that represented. Yeah, when the DCPS percentage continue to grow, we may quickly provide that kind of percentage change. Okay, so thinking about the significant improvement in gross margin, would you bucket that more towards DCBBS ramp or more towards
Charles Liang (Founder, President and Chief Executive Officer)
a reduction in your 10% customer going from 63% to 27% from the December to March quarter. Yeah, I guess there are two factors. We'll continue to improve our gross margins. One is DCPS solution. With that segment our profit margin did most of the time are more than 20%. And the other segment is enterprise customer focus. We start to grow many more enterprise customer and we will continue that direction. So that will improve our gross margin and net margin as well. Okay. And then included in the guidance is the expectation that this customer does 27% of revenue in the current quarter will
Neil Young
continue to be a 10 plus percent customer. Yes, we will have many more neo cloud, kind of middle sized cloud customer and even small size cloud customer. And for sure we will continue support a large cloud customer as well but more near cloud, small cloud, enterprise cloud. So overall our margin will continue to improve.
Charles Liang (Founder, President and Chief Executive Officer)
Your next question comes from the line of Quinn Bolton with Needham and company. Please go ahead. Hey, this is Neil Young on Brooklyn Bolton. Thank you for letting me ask a question. So I was hoping you could touch on maybe what drove you did a little bit but maybe touch on what drove the strong quarter over quarter increase in enterprise and then you know are you expecting to see healthy growth from enterprise again here in the next quarter and through fiscal year 27 or you know should we think about the revenue split by channel more closely reflecting 2Q and then I have a follow up. Thank you. Yeah, we don't provide a detail but the direction is there very strongly. I mean improve many more enterprise customer and we see lots of customers really like to work with us. And then at the same time DCPs help us to engage with more and more near cloud and enterprise AI data center customer. The long term we feel pretty comfortable in this direction. Okay, thanks, that's helpful. And then just wanted to go back to gross margin one last time. Do you help us think about sort of what level is sustainable? You know as we do look into fiscal year 27 as it seems like large AI deployments will most likely, you know, trend towards being a bigger mix of revenue in the coming quarters. Thanks. Yeah, we believe we'll continue our grow in a very healthy way because we are growing customer base, we are growing our product line, we are growing total solution including software and service. So we are getting to a much mature, much high value partner to the market.
Mark Newman (Equity Analyst at Bernstein)
Your next question comes from the line of John 10:1 with CJS Securities. Please go ahead.
Charles Liang (Founder, President and Chief Executive Officer)
Hi, thank you for taking my questions and really nice quarter. I was wondering if you could just address a little bit more on the export violation issue and if that might impact your ability to finance growth or the cost of finance growth going forward. And I don't know if you talked about the cost of remediation or addressing the violations, preventing them from happening again, but if you could help disclose that, that would be helpful as well. Yeah, John, I think I'll go back to the, you know, the comments that I made earlier that you know, that you know, we, the company was not named, you know, in this. And so therefore we, you know, we take these things very seriously. But we, and we're conducting our own internal investigation as you know. And I don't want to add any more to that. And also kind of based on what we know so far though, that could be a change as the investigation process. No one from the company other than those names in the DOJ indictment was involved. So we have a very good confidence with our integrity. Perfect, thank you. And then I have a follow up, if I could. You mentioned record backlog and strong orders and I was wondering what that indicates heading into the back half of this calendar year, just from a growth perspective, number one. And number two, if the supply environment can support growth over the first half. Yeah, basically we are fast growing company as you know, so we can grow much faster if we accept low margin business. So we try to be a balance in between the growth and gross margin and net margin. So basically we are in good shape. I would like to say we can control and decide the ratio, the balance. Great, thank you for that. Thank you. Your final question comes from the line of Mark Newman with Bernstein. Please go ahead. Thanks for squeezing me in. And congrats on the gross margin. On the gross margin and the mix. It sounds like the gross margin rebound is driven partly by some of these what you call expedition charges reducing. But also sounds like if I get it right, the enterprise mix is also helping. I wanted to ask, just clarify if that's right and within enterprise, is that AI server or is this more traditional server? I have another question also on the revenue as well. Thanks indeed. Both kind of for AI enterprise. I mean a lot of genetic AI kind of inventing application. So we see a very strong demand there. And for traditional server and storage, even IoT, we also start to graciously support and expand this market and we see a very good progress. So we'll continue overall enterprise business. Okay, great. And then on the revenue, it sounds like the reason for the slightly light revenue was this 63% customer last quarter now pushed out a little bit, which is I believe the 27% customer, as that customer comes back, presumably if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the, in the coming quarters? And also just one more quick question. You mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time. Yes. So we don't, we don't give out our backlog number. So the, we just make general comments about the fact that it's very strong. But we are, as I mentioned earlier, we've diversified our pipeline extensively and so we have, as Charles mentioned, we have a number of large deals from, from new, you know, neo clouds and cloud service providers which we are expecting to increase both our, you know, our footprint, our customer diversity as well as our margins along with our dcbbs and enterprise expansion. Okay, thanks very much.
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