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Super Micro Computer Inc (SMCI) Q1 2022 Earnings Call Transcript

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SMCI earnings call for the period ending September 30, 2021.

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Super Micro Computer Inc (SMCI 1.50%)
Q1 2022 Earnings Call
Nov 2, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Supermicro First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]

At this time, I would like to turn the conference over to Nicole Noutsios, Investor Relations for Supermicro.

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Nicole Noutsios -- Investor Relations

Good afternoon and thank you for attending Supermicro's call to discuss financial results for the first quarter, which ended September 30, 2021. By now, you should have received a copy of the news release from the Company that was distributed at the close of regular trading and is available on the Company's website. As a reminder, during today's call, the Company will refer to a presentation that is available to participants in the Investor Relations section of the Company's website under the Events and Presentations tab. We have also published management's scripted commentary on our website.

Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook, including guidance for the second quarter of fiscal year 2022 and the full fiscal year 2022, and the potential impact of COVID-19 on the Company's business and results of operations.

There are a number of risk factors that could cause Supermicro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2021, and our other SEC filings. All of these documents are available on the Investor Relations page of Supermicro'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 business outlook.

For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or to 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. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts to ask questions.

With that, I'll now turn the call over to Charles Liang, Founder, Chairman and Chief Executive Officer.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Thank you, Nicole, and good afternoon, everyone. I am pleased to announce that our quarterly revenue exceeded $1 billion even during a traditionally weak September quarter. For fiscal Q1 2022, we delivered strong year-over-year revenue growth of 35%. We continued to gain market share and are executing well against our plan to achieve $10 billion in annual revenue. The revenue growth was driven by strong progress across many key customers with our Total IT Solution strategy.

Now, let's look at some highlights from the quarter. First, our fiscal first-quarter net revenue totaled $1.03 billion. It's our second consecutive quarter of $1-plus billion in revenues, up 35% year-on-year and down 3% quarter-on-quarter, exceeding our guidance of $900 to $980 million. Our efforts continue to enable our growth trajectory at multiple times the average industry growth rate. Our fiscal first-quarter non-GAAP earnings per share was $0.58, compared to $0.55 in the same period one year ago and higher than our guidance of $0.28 to $0.48. All our major geographies contributed significant year over year growth with the APAC region including Japan doubling year-over-year.

The newly completed Taiwan expansion at Bade is greatly helping our Asia and EMEA growth momentum by providing additional capacity and lowering operational cost. These results show that we remain on track to achieve our $10 billion annual revenue target as we previously shared. We started our business with the best system building block solutions on the market 28 years ago. After many years of servicing the System Integrators and Value-Added Resellers, we began to offer application-optimized complete systems to direct partners including many appliance partners, OEM and large enterprise accounts.

In the past 10 years, we have continued to expand and began our business transition from a hardware solutions company to a Total IT Solutions company that combined hardware, software, services and more things. With application optimized total IT solutions for many vertical markets and a much broader technology footprint today, we are redefining our growth drivers to speed up our growth strategies.

First, Sub-system and Components. We will continue to offer server motherboards, enclosures, barebones and accessories to the market to continue help growing our market share. Second, Complete Systems. We will continue to fully focus and expand on growing our complete hardware systems with technologies co-developed with our key partners including Intel, AMD, NVIDIA, Broadcom, and others. Third, Total IT Solutions. We are accelerating our development of Appliance and Plug-n-Play (PnP) Rack-Scale Solutions for AI/ML, Industry Automation, IoT, 5G/Telco and Cloud products.

And number four, 5S's. We are finally ready to aggressively promote our Software, Service and Switch Product lines. And I will share more about the other two S's when they are ready. Our building blocks and complete systems business have been steadily growing over the decades, and they serve as the key backbone of our revenue growth. With more enterprise customers and appliance partner's engagements, our Rack Scale, Total IT Solutions business is our new major focus now. To make our Total IT Solutions a seamless experience for our customers, we have been increasing our R&D resources to focus on many software products, service, and networking for many years.

These products, as higher value parts of our Total IT solutions, will be the keys to improve our margins and profitability in the coming quarters and years. Our new online auto-configurator together with our new B2B program are now driving our business growth more efficiently than ever before. Our innovative new command-center based customer service system have been greatly helping our sales, FAE, PM teams, as well as our key customers. They are dramatically improving our business interactions with customers much faster, much accurate, more optimized and more customer-friendly while reducing manpower, human delay and error.

Our new intelligent database-driven tools are indeed performing much smarter and faster than human efforts in most areas. This automated-intelligent system is servicing our salesforce and customers to their great satisfaction now, and it will be constantly upgraded and updated. Our push toward Total IT Solutions is benefiting Supermicro and our customers in multiple ways. Most importantly, our customers will receive higher-quality products that are fully optimized, integrated and validated in house. For the PnP, plug-and-play rack-scale products, our customers just need to connect network and power cables. And then this is one application.

This shrinks their deployment time from many weeks to a few hours. The total IT solution is also helping Supermicro and our customers to mitigate the impact of the global shortage and our supply chain disruptions by accurately forecasting, building inventories in scale and prioritizing with our strategic partners. The system building block solution allows us to utilize sets of common sub-systems and components to create, design, and deliver first-to-market products with reduced manufacturing and supply chain complexity and risk. This will dramatically improve our customer's time-to-market, which is critical to their success. The total IT Solution is indeed a win-win-win proposition for Supermicro, our customers and our supply chain partners.

Customers can get a taste of our Total IT Solutions now by signing up for our new JumpStart Program. They can remotely run their software and applications on our custom, preconfigured, pre-validated racks powered by the latest generation of Intel, AMD, and NVIDIA GPUs. We are also providing hosted instances of plug-and-play Cloud Infrastructure with operating systems and other tools that can be accessed remotely for development and testing. The program will instill more confidence in Supermicro customers as it delivers the convenience, faster time to market, performance optimization, cost savings and security. In summary, Supermicro is rapidly growing and is transforming into a Total IT solution company from a server hardware company.

In addition to providing the greenest hardware total solution, our software, switch and service products are now ready for any large enterprise, Cloud, AI, and Telco customers. Second, we are building on and expanding our successful product and technology leadership. Our new growth factors, including the Total IT Solutions and the fast-growing 5S product lines, are keys to achieving our $10 billion revenue target and higher profitability. Third, replicating our market share success in the US to APAC and EMEA with the completion of our new APAC campus in Taiwan.

And fourth, our new Command Center Based Auto configurator and B2B Automation platforms are getting broadly used by customers around the world now, and they are accelerating our market-share gains and customer satisfaction. In closing, I am getting much happier with the progress of our business transformation, which is resulting in an acceleration of our business in FY22 and beyond. As a Total IT Solutions company, our TAM continues to increase as we invest our resources for growth, and I am optimistic about achieving our $10 billion annual revenue goal on a much sooner schedule.

With that, I will now pass the call to David Weigand, our Chief Financial Officer, to provide additional details.

David Weigand -- Senior Vice President, Chief Financial Officer

Thank you, Charles. We continued to experience diversified growth across our key market verticals, exceeding $1 billion in revenue for the quarter, above the high end of our guidance range. This is the second consecutive quarter that revenues have exceeded $1 billion. Revenue growth was driven by sales to large enterprise, Cloud, AI, and Telco markets continued strength across all geographies and strong demand for our products and services. Our fiscal first quarter revenue totaled $1.03 billion, reflecting a 35% year-on-year increase and a 3% decrease on a quarter-over-quarter basis.

Looking at Supermicro's Q1 revenue in our three-market verticals, we achieved $725 million in the Organic (Enterprise and Channel) AI/ML vertical, $250 million in the OEM appliance and large data center vertical, and $58 million in the 5G/Telco and Edge/IoT vertical. Systems comprised 82% of total revenue and the volume of systems and nodes shipped were up year-over-year. System node ASPs increased year-over-year and quarter-on-quarter. On a year-on-year basis, Asia increased 108% as we saw continued growth with both existing and new customers, Europe increased 60%, US increased 13% and Rest of World increased 6%.

On a sequential basis, Asia increased 29%, US sales decreased 14%, Europe decreased 3%, and Rest of World decreased 1%. From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis. Working down the P&L, the Q1 gross margin was 13.4%, down 30 basis points quarter-over-quarter from Q4 due to higher freight and supply chain costs as was also reported by many other companies around the world. On a year-over-year basis, gross margins were down 370 basis points due to a discrete cost recovery event in Q1 of last year, while also incurring higher freight, supply chain and other costs in Q1 fiscal year 2022. Turning to operating expenses, Q1 opex on a GAAP basis increased 2% quarter-on-quarter and 10% year-on-year to $109 million.

On a non-GAAP basis, operating expenses increased 2% quarter-on-quarter and increased 7% year-on-year to $101 million. The year-on-year and quarter-on-quarter increases on a GAAP and non-GAAP basis were driven primarily by higher personnel expenses due to increased headcount, especially in Asia. Other Income and Expense including interest expense was a $0.8 million expense as compared to a $2.1 million expense last quarter. The sequential change is mostly related to FX. This quarter the tax provision was $3.3 million on a GAAP basis and $6.2 million on a non-GAAP basis. Our non-GAAP tax rate was 16.6% for the quarter.

Lastly, our share of income from our JV was $0.4 million this quarter as compared to $0.6 million last quarter. Q1 non-GAAP diluted EPS totaled $0.58 which was higher than our mid-point guidance of $0.38 due to higher revenues, and lower operating expenses, offset by lower gross margins. Cash flow used in operations was $134.6 million compared to cash flow generated from operations of $63.6 million in Q4 as we built inventory ahead of a seasonally strong December quarter and positioned ourselves to mitigate the impact of supply chain disruptions. capex totaled $11.9 million resulting in free cash flow consumption of $146.5 million.

Key uses of cash during the quarter included increases to inventory, payments made to reduce accounts payable offset by an increase in deferred revenue. We did not repurchase any shares in the quarter. Our closing balance sheet cash position was $270 million, while bank debt was $279 million as we drew down on our bank lines of credit to increase inventory as we ramped production of new platforms globally. Turning to the balance sheet and working capital metrics compared to last quarter, our Q1 cash conversion cycle was 94 days, up from 80 days, above our target range of 85 to 90 days due to higher inventories. Days of inventory was 114, representing an increase of 18 days versus the prior quarter. Days Sales Outstanding was up by four to 41 days while Days Payables Outstanding was up by eight to 61 days.

Now turning to the outlook for our business. We expect net sales in the range of $1.1 billion to $1.2 billion, GAAP diluted net income per share of $0.60 to $0.80 and non-GAAP diluted net income per share of $0.70 to $0.90 for the second quarter of fiscal year 2022 ending December 31, 2021. We expect gross margins to improve as we manage supply chain costs and maintain price discipline. Over the upcoming quarters, we continue to expect to achieve margins within our target model as we further scale our Taiwan operations and begin to gain traction from our new product offerings and auto configurator B2B/B2C solutions. GAAP operating expenses are expected to be approximately $112 million and include $7 million in stock option compensation expenses and $1 million in other expenses includes approximately $8 million in expected stock, days compensation and other expenses, net fax FX that are excluded from non-GAAP diluted net income performance share, forecast of $4.1 to $4.5 billion.

GAAP diluted net income per share is expected to be at least $2.77 and versus our prior forecast of $2.6 and non-GAAP diluted net income per share of at least $3.2 versus our prior forecast of at least $3. The company's projections for GAAP and non-GAAP diluted net income per common share both assume a tax rate of approximately 16% and a fully diluted share count of 54.1 million shares per GAAP and 55.6 million shares for non-GAAP. The outlook for fiscal year 2022 GAAP diluted net income per common share includes approximately $33 million in expected stock-based compensation and other expenses net of tax effects that are excluded from non-GAAP diluted net income per common share. We expect capex for the fiscal second quarter of 2022 to be in the range of $3 million to $5 million.

I'll turn it back over to you now Nicole.

Nicole Noutsios -- Investor Relations

Operator, now you can open up the line for questions.

Questions and Answers:

Operator

The floor is now open for your questions. [Operator Instructions] Your first question comes from Ananda Baruah of Loop Capital.

Ananda Baruah -- Loop Capital -- Analyst

Hi, guys, listen. Good afternoon. Congrats and thanks for taking the question. I guess a couple for me, just to start off, could you talk about -- it seems like you're highlighting, both in the press release and then in your remarks, new design wins and speaking of them broadly is that they're across the business. Could you maybe talk to what you saw that was most exciting for you and most incremental to the business throughout the quarter? And then I have a couple of follow-ups. Thanks.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. Thank you. A very good question. Yes, as I shared in last few quarters, we start to engage more and more large enterprise account. And we again -- you see [Indecipherable] before larger account in the last few quarters, including 5G Telco, including AI machine learning and including HPC as well.

So pretty much across broader range, we have more customer. And with our B2B automation auto configurator as I mentioned. Now, we are able to have sales engineer and PA to communicate with customer much more efficiently. So now we have more bandwidth to talk to more customers, talk to more customers' application in more detail. So I believe, we will continue to gain customer and again, design win.

Ananda Baruah -- Loop Capital -- Analyst

That's helpful context, Charles. Thanks. And how would you characterize, I guess, the -- well, I don't think I want to call it progress with the new Taiwan facility. Could you just describe for us the appropriate -- like how -- like the appropriate context or that we can understand what the operation feels like right now, both from a production perspective, but also from a revenue-generating perspective as well.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. Thank you for the question. Yes, as I shared with you in the last few quarters, my[Phonetic] Asian campus, production capacity is very important to our business. Is in USA, especially our operation has been pretty much focused on Bay Area in the last 28 years, and it's really close to too high. So we are very happy. Finally, we have a big campus in Taipei, Taiwan.

And now we have a big capacity ready. Indeed, we -- today, we just utilize about less than 30% of the capacity. So we have, I mean, cheaper capacity available in Asia now. So we are very happy, and we started to very aggressively engage customer in Asia and EMEA or even leverage the Taiwan capacity to support the customer in USA. So that's a very positive change to us.

Ananda Baruah -- Loop Capital -- Analyst

And how long, Charles, any estimate on where you'll get the kind of normalized capacity utilization in the Taiwan facility?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Okay. Good. Because of the global shortage, right, otherwise, our revenue must be much bigger than today. We are around $1.03 billion this quarter pretty much because of our global shortage. Otherwise, that numbers could be much bigger.

So at this moment, our iteration rate in Taiwan is about 30% or a little bit bad. And we expect once the globally shortage program released, we will use 80% to 100% capacity in Taiwan, almost in a few quarters. So we have a very strong demand and just need a supply chain to be improved.

Ananda Baruah -- Loop Capital -- Analyst

That's really helpful, Charles. I appreciate it. I'll get back in the queue. Thanks a lot.

Operator

Your next question comes from Mehdi Hosseini of SIG.

Mehdi Hosseini -- SIG -- Analyst

Yes, thanks for taking my question. A couple of follow-ups. Regarding the balance sheet and cash flow, can you remind me how much more line of credit you have that you can utilize?

David Weigand -- Senior Vice President, Chief Financial Officer

So we have a $200 million line of credit with the Bank of America, and we also have over $300 million in credit lines in Taiwan as well.

Mehdi Hosseini -- SIG -- Analyst

Okay. So of the total $500 million, that's an -- being utilized, right?

David Weigand -- Senior Vice President, Chief Financial Officer

Yes. As you see from our balance sheet, we're sitting at about $279.

Mehdi Hosseini -- SIG -- Analyst

Got you. Okay. And then regarding the growth, can you maybe, Charles, or anyone else from the team, help me understand what were the key growth drivers in Asia? Asia more than doubled on a year-over-year basis and in the US, which is the largest market, had a double-digit growth, but Asia was up double digit. What were the key drivers behind that growth?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. Indeed, in Asia, we did not have a really strong promotion before because our capacity before was limited in Asia. And other time, we had to ship the product from USA to customers in Asia. That was our business before. Now with Taiwan capacity, much much bigger ready.

So we are very aggressively approaching customer in Asia and even -- not just in Asia in -- even -- European customer from Asia, also a very good arrangement. And we start to focus, kind of, our sales force in Asia. So that's the major reason. And we will continue to invest more sales marketing team in Asia and EMEA, as well as in East Coast. Indeed, in USA, East Coast will be a very sweet stuff as well. And we just have a strong team as that will focus on US East Coast --.

Mehdi Hosseini -- SIG -- Analyst

Yes. Perhaps maybe if I rephrase the question, you highlighted three buckets of revenue, organic -- and organic enterprise, OEM, and the Telco, was there any particular end market that was particularly strong in Asia?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

AI, for example, and Telco, 5G Telco, for example. And indeed, because our Asia market share was small before. So basically, we have a lot of room to grow in Asia.

Mehdi Hosseini -- SIG -- Analyst

Got it. Thank you.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Thank you.

Nicole Noutsios -- Investor Relations

Next question, please.

Operator

Your next question comes from Nehal Chokshi of Northland Capital Markets.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Yes, thank you. And fantastic results and very strong guidance. Great to see that. A couple of questions from me. Charles, what's your perspective on whether the worst of global supply chain issues have passed or not? And then related to that, how long do you think it will be prudent to continue carrying more base inventory than typical?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Very good question and big question. As you know, we usually keep about $900 million inventory and now grew to almost $1.3 billion. So the reason why we grow inventory so quickly is because we want to make sure we are doing our best to support the customers and to support our growth.

So we continue to improve our relationship with our supply chain. And it's really a big shortage, especially in our chips, right? Those are I/O chips, especially a small chip like what I mentioned before. And some CPU shortage as well. GPU, some slow delivery as well.

So we are facing a lot of logistical delay. And however -- because we are providing IT Total Solution now. So we're taking care of our difficulty portion and chip complete present play direct solution to our customer. So most of our customers now very appreciate Rack-Scale total solution.

And we just have to continue working with our supply chain to enable those shortage item. And how soon can we fix those problems. It's really a global problem. So people including myself, I guess maybe at least in another three months to four months. And hopefully, end of the day, things will be improving.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Great. Thank you for that perspective. And then following on Mehdi's question regarding regional performance, helpful on what's driving Asia, David, you did say that US was down 14% Q2, is that seasonal? Or is there something more going on there?

David Weigand -- Senior Vice President, Chief Financial Officer

I think it's simply just a matter of digestion. We had some large, very large purchases, and there was some digestion of those purchases, and we expect those to return.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Got it. All right. I'm going to get back in the queue. I believe everybody else had some good questions as well. Thank you.

Operator

Your next question comes from Aaron Rakers of Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Yes. Thanks for taking my questions. And also congrats on the quarter and the guide. Just kind of dovetailing off the component question. Everybody is definitely seeing supply constraint.

I guess my question on that is, can you comment on what you're seeing from a pricing perspective of some of the key components in the supply chain, be it memory or other components? And what you're doing to maybe pass-through some of that pricing? Or how effective you've been there?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. I mean, as you may know, right, CRN price is dropping now since last month, so maybe two months ago. So CRN supply is getting a much better position than before. So other than CRN and most of the other components, still have a big shortage.

And we foresee some IC price will continue going up. As you know, even TSMC November 1st, some of their product line cost will increase to their customer. So overall, I feel -- seeing some improvement, but won't be right away.

Aaron Rakers -- Wells Fargo -- Analyst

And how are you reacting with your own pricing?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

We basically pass-through to our customer whatever we can, and customer is getting used to this model because we just cannot afford to carry so much price rate. This year, the customer pretty much understand that.

Aaron Rakers -- Wells Fargo -- Analyst

Yes. In this environment, a lot of companies have seen -- are requested maybe their own customers to provide longer lead times on their own purchase commitments. Have you also asked your customers to lengthen out their lead times and, therefore, given you more visibility in the business beyond maybe just this next quarter?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. Basically, we hope so. But the problem is we cannot deliver even our back order today. So that's why we did not push customers to predict order much earlier. But we hope they can more transparent to us about their forecast, about their IPO, yes, for sure. But again, the current backorders indeed have been a big demand, and we had to fulfill that as soon as possible.

Aaron Rakers -- Wells Fargo -- Analyst

Yes. And then the final question, just kind of strategically, I'm curious about is, I think the company is fairly well-positioned given your engineering presence and breadth around the role of AI and the proliferation of AI from a compute layer perspective. Can you help us appreciate how material AI is? I'm assuming that server platforms that are incorporating a GPU predominantly, how big that business is? How fast it's growing?

And any kind of thoughts at a high-level? How much that changes the business -- of the mix of your business on AI-optimized server relative to more of a traditional server?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. AI-optimized server, for sure, is a high-value, high performance, high-value. And we are very aggressive to continue to grow our AI machine. Indeed, our AI machine, including computer system and some payable, I believe our market share still pretty much top one or top two. I hope top one.

And I believe, it will continue to grow very strongly because we have been focused so much on those high-end products, including a Total solution, right? AI Total solution. We start to ship kind of AI Cloud to some of our partner. Again, that makes our customers' job much easier.

Or when we ship that direct to customers, customers are able to get targeting networking cable, power cable and pretty much ready to run their applications. So with Total AI Cloud, Total AI solution, I am very optimistic that our deep learning AI/machine, even including a video streaming solution, will continue to grow very fast.

Aaron Rakers -- Wells Fargo -- Analyst

Very helpful. Thank you, guys.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Thank you.

Operator

Your next question comes from Jon Lopez of Vertical Group.

Jon Lopez -- Vertical Group -- Analyst

Thanks very much. Can you hear me all right?

David Weigand -- Senior Vice President, Chief Financial Officer

Yes, Jon, we can.

Jon Lopez -- Vertical Group -- Analyst

Great. Thanks, David. So I had a couple of quick ones. I wanted to start on the inventory side as well, so I apologize for doing that. But if I remember correctly, I think your purchase commitments, your inventory purchase commitments as of June we're up $550 million, $575 million, something in that ballpark. And had doubled versus where they were at the end of 2020 -- calendar 2020.

Can you give us a feel for where that stands now as of the end of September? And just given the size of these increases, does that ultimately find its way onto your balance sheet? Or are you now at sort of a steady-state level where what's going out is more being matched with what's coming in?

David Weigand -- Senior Vice President, Chief Financial Officer

Yes. So I think the key is we're going into a seasonally strong December quarter. And so we -- that, combined with the fact that we've got to make sure we get ahead of supply chain delays as much as possible, has really driven our decision to increase inventory levels up.

So therefore, in the current market with the delays, both on the delivery side as well as on the production side and the delays in containers, making it to port, you've got to order earlier. So therefore, we have to place orders in order to keep up with our customer demand. So that's really -- and that's why we increased our credit lines and used those to increase inventory.

Jon Lopez -- Vertical Group -- Analyst

Okay. Got you. And just on the top of your head, David, do you know what that number stood as of September?

David Weigand -- Senior Vice President, Chief Financial Officer

We don't -- no, I don't. I don't release that number on the quarter.

Jon Lopez -- Vertical Group -- Analyst

Okay. All right. Great. Thanks for that. Secondly, I'm sorry, go ahead, please.

David Weigand -- Senior Vice President, Chief Financial Officer

So we'll have a little more color in the 10-K.

Jon Lopez -- Vertical Group -- Analyst

Sure, of course. Your deferred revenue actually jumped up quite nicely. The current deferred is up like double digits, which hasn't really been the case for the last couple of quarters. Why was that?

David Weigand -- Senior Vice President, Chief Financial Officer

So two reasons. Number one, we had some customers who prepaid. And number two, we had some additional services that were -- an increase in services that we had to defer.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Just to respond to -- I just mentioned, we start to focus on our 5s[Phonetic] business, right, the software, breach and service. And those products have a higher profitability, but they are also generate default revenue.

Jon Lopez -- Vertical Group -- Analyst

Got you. That's really helpful. Thanks. Sorry, two other quick ones. The first one is, David, I think you made mention to gross margin. I think you said it was going to increase. I wasn't sure if that meant in the December quarter or that was just sort of an intermediate term comment.

But can you remind us, A, like what are the targets again? And B, just put some color around that comment and how we should think about maybe trending in trajectory?

David Weigand -- Senior Vice President, Chief Financial Officer

Sure. Absolutely. So our target model gross margin is, of course, 14% to 17%. And we've mentioned that, again, this quarter, our transportation costs, our freight costs went up by $3 million or 30 basis points.

And that was on top of the increase from the prior quarter. Now, I can tell you that in my discussions with our operations people, it looks like that amount is starting to level off -- the rates are leveling off. And so we are -- so the guidance that we give -- is giving -- or giving is to be up both in Q2 as well as in the second half.

Jon Lopez -- Vertical Group -- Analyst

Got you. Really helpful. Okay. And sorry, David, is that leveling off a relatively recent phenomenon? Or is that something that you observed through the course of the quarter?

David Weigand -- Senior Vice President, Chief Financial Officer

That's just -- I mean, there's only been one month in this quarter. But so far, they don't seem to be increasing at the same rate that they were in prior quarters.

Jon Lopez -- Vertical Group -- Analyst

Got you. Okay. I was having take the prior quarter, so they kept increasing through your fiscal...

David Weigand -- Senior Vice President, Chief Financial Officer

Yeah, in other words through Q4, they continue to increase. And then in Q1, they also increased another 30 basis points. And another -- think of it as 30 basis points on lower revenues that the freight costs went up. So I'm saying in the current Q2, we see that leveling off.

Jon Lopez -- Vertical Group -- Analyst

Got you. Really helpful. And sorry, my very last one. Just as we think about your fiscal '22 guidance, you mentioned that both units and prices increased in your September quarter. I'm wondering, as we think about the sort of, let's call it, 20-odd percent growth that you're building in for your fiscal '22. Can you give us a rough sense for how much of that is going to come from pricing versus what's going to come from the units?

David Weigand -- Senior Vice President, Chief Financial Officer

I think that's too hard to judge.

Jon Lopez -- Vertical Group -- Analyst

Yes. Okay. Okay. Would you -- that it's going to be a combination of the two? Maybe I can make it there?

David Weigand -- Senior Vice President, Chief Financial Officer

Absolutely. Absolutely.

Jon Lopez -- Vertical Group -- Analyst

Okay. All right. Great. Thank you very much. Helpful thoughts.

Operator

Our next question comes from Nehal Chokshi of Northland Capital Markets.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Thanks for taking my follow-up questions. And great on the breakout relative to the three pillars of growth that you laid out at your Analyst Day, really appreciate that. Do you have color on how this release trended on a year-over-year basis relative to the overall year of your growth?

David Weigand -- Senior Vice President, Chief Financial Officer

Yes. So we're actually on the verticals, we didn't -- we're not going back on a year-over-year basis because we really started tracking this closely, beginning with the fiscal year-end. And so -- but as each quarter now, we'll give a little bit more insight.

But I can tell you that the one vertical that went down, which was in the 5G -- I'm sorry, the OEM and OEM appliance was really, as I mentioned, that was the digestion that I referred to from a couple of customers, and we see that returning -- that purchasing returning in Q2.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Got it. Great. And then what is the risk, the strong demand that you're seeing as a result of the supply chain disruptions and that you are having new customers come to you in an effort to double or triple source or quadruple source and effectively alleviate their own supply chain issues?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes, this is a very important area. We watch very well. So most of our orders are pretty evenly come from our broad customer base. So at this moment, I do not see any specific risk there.

So it pretty evenly come from many customers and from many different vertical. And by the way, our Building Box Solutions, the advantage is we can simply kind of [Indecipherable] configurated the system. So even if when customers slow down, we won't have to kind of really have a hard time for overall inventory.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Sure. I think that latter -- has an excellent point. So maybe I'll just crank that up. Of the incremental demand that you're seeing, how much of that is coming in the form of a configuration that your competitors typically would not satisfy with their much more limited configurations that they can provide?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Yes. Indeed, I'm very happy to share. Most of our growth are from our Building Block Solutions. After we continue to [Indecipherable] our Building Box solution, indeed, most of the customer now -- Building Block Solution because it could easily to support their urgent demand and also best overall inventory risk for our sale and volume sales.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Okay. Great. And then my final follow-up question is for Dave. SG&A, I think, was down $4 million in Q2, is that correct? And why is that?

David Weigand -- Senior Vice President, Chief Financial Officer

So we had a little bit lower. First of all, it was -- we had increased personnel costs. And then we did have a little bit lower bonuses this -- in Q2. I'm sorry, in Q1, I said Q2 -- in Q1.

Nehal Chokshi -- Northland Capital Markets -- Analyst

All right. Got it. Thank you very much.

Operator

Your next question comes from Jonathan Tanwanteng of CJS Securities.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Hi, everybody. Thank you for taking my question. Great quarter and outlook. David, I was just wondering if you could clarify the sequential increase in gross margins. What was getting that -- where are you finding that? Is it mostly your selling prices catching up to inflation? Are you expecting to reduce some costs or realize some other efficiencies? Or is there a mix improvement as you go forward? Just help me understand what the sequential increase coming from?

David Weigand -- Senior Vice President, Chief Financial Officer

Sure, John. There's a number of factors. Number one, we expect to start gaining traction from our Auto configurator, B2B, B2C solutions. We also have been exercising more price discipline.

And also, we've learned how to manage -- how to better manage the passing on of freight charges and other things and our cost increases to our customers. So that, along with some of the margins from our new product offerings, give us a little bit better insight into margin growth.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Okay. Perfect. And I wanted to touch on the Auto configure and B2B. You mentioned actually. What was the sales advantage there? I don't know if you can quantify it exactly, but just give us a sense of how important that is to your growth and how big you expect it to be going forward in the next couple of quarters?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

It will be very important, especially for our long-term. Before we -- manpower, sales, FA and PA to work with customer one by one. But now we see inhabiting[Phonetic] database, not online for CT, are able to help customers figure out what's the base configuration, what's the base of the product for them and then embed it through our commence center-based service.

So almost all our customer in sales who are able use that system are very happy with the service and shrink the time to communicate and make the communication much more accurate, product optimization, much more cost down and better performance. So for midterm, long-term, I'm very optimistic with this Auto configurator command center-based B2B system.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Great. Maybe just the last one for me. What is the margin of sales through that channel compared to your regular sales maybe versus what it normally has been?

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

We did not share with that number yet. But basically, the profitability will be higher because B2B Auto configurator, we are able to work with many more customers and especially a lot of middle-sized enterprise customer now.

But before we can take care only large-scale customer because we do not have enough manpower to take care of too many at a time. But now with automation we have, we are able to reach to many more middle-sized enterprise account. And for those accounts, as you know, in -- margin, we have been better.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Okay. Great. Thank you.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Thank you.

Operator

Thank you. [Operator Instructions] [Operator Closing Remarks]. One moment.

Nicole Noutsios -- Investor Relations

One moment, please. Sorry, Charles. --.

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

Thank you so much for joining us. And very happy to see you next quarter again. Thank you and a good day.

Operator

Thank you everyone. [Operator Closing Remarks].

Duration: 54 minutes

Call participants:

Nicole Noutsios -- Investor Relations

Charles Liang -- Founder, President, Chief Executive Officer, Chairman of the Board

David Weigand -- Senior Vice President, Chief Financial Officer

Ananda Baruah -- Loop Capital -- Analyst

Mehdi Hosseini -- SIG -- Analyst

Nehal Chokshi -- Northland Capital Markets -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

Jon Lopez -- Vertical Group -- Analyst

Jonathan Tanwanteng -- CJS Securities -- Analyst

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