Ladies and gentlemen, thank you for standing by, and welcome to Super Micro's 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To remove yourself from the queue, simply press star one again. At this time, I would like to turn the conference over to Nicole Noutsios, Investor Relations for Super Micro. Please go ahead.
Good afternoon, and thank you for attending Super Micro'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 is distributed at the close of the regular trading and is available on the company's website. As a reminder, during today's call, the company referred to its presentation that's available to participants in the IR section of the company's website under Events and Presentations tab. We've also published management scripted commentary on our website.
Please note some of the information you 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 the fiscal year 2022, mid- to full fiscal year 2022, and the potential impact of COVID-19 on the company's business results of operations.
There are a number of risk factors that can cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2021, and our other SEC filings. All these documents are available on the Investor Relations page of Super Micro's website. We assume no obligation to update any forward-looking statements.
Most of today's presentation referred 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. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and the supplemental information attached in today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell side to ask questions. With that, I'll now turn the call over to Charles Liang, Founder, Chairman, and Chief Executive Officer. Charles?
Thank you, Nicole, and good afternoon, everyone. I'm pleased to announce that our quarterly revenue exceeded $1 billion even during a traditional weak September quarter. For fiscal Q1, 2022, we delivered strong year-over-year revenue growth of 35%. We continue to gain market share and are executing well against our plan to achieve $10 billion annual revenue.
The revenue growth was driven by strong progress across many key customers with our total IP solution strategy. Now, let's look at some highlights from the quarter. First, our first quarter net revenue totaled $1.03 billion. It's our second consecutive quarter of $1 billion plus in revenue, up 35% year-on-year and down 3% quarter-on-quarter, exceeding our guidance of $900 million-$980 million.
Our efforts continue to enable our growth strategically 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-$0.48. All our major geographies continue to contribute significant year-over-year growth, with the APAC region, including Japan, doubling year-over-year.
The newly completed Taiwan expansion at Hsinchu is greatly helping our Asia and EMEA growth momentum by providing additional capacity and lowering operating cost. These results show that we remain on track to achieve our $10 billion revenue target as we previously shared. We started our business with the basic system building block solution on the market 28 years ago.
After many years of servicing the system integrators and value-add resellers, we began to offer application optimized computer systems to direct partners, including many appliance partners, OEM and large enterprise account. In the past 10 years, we have continued to expand and begin our business transition from a hardware solution company to a total IP solution company that combine hardware, software, service, and more features.
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, subsystem and components. We will continue to offer server motherboards, enclosures, barebone, and accessories to the market to continue help growing our market share. Second, computer systems.
We will continue to fully focus and expand on growing our complete hardware system with technologies co-developed with our key partners, including Intel, AMD, Nvidia, Broadcom, and others. Third, total IT solutions. We are accelerating our broad development of appliance and plug-and-play rack scale solutions for AI, machine learning, industrial automation, IoT, 5G telco, and cloud products.
Number four, 5S. We are finally ready to aggressively promote our software, service, and switch product lines. I will share more about the other two S when they are ready. Our building blocks and computer systems business have been steadily growing over the decades, and they serve the key backbone of our revenue growth. With small enterprise customers and key appliance partners engagement, our rack scale total IT solution 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 resource 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 key to improve our margin and profitability in the coming quarters and years. Our new online Autoconfigurator, together with our new B2B program, are now driving our business growth more efficiently than ever before.
Our innovative new Command Center suite customer service system has been greatly helping our sales, FAE, PM, 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 errors. Our new intelligent database-driven tools are indeed performing much smarter and faster than human efforts in most areas.
This artificial intelligence system is servicing our sales force and customers to their great satisfaction now, and it will be constantly upgraded and updated. Our push for more total IT solution is benefiting Super Micro and our customers in multiple ways. Most importantly, our customers will receive higher quality products. They 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 cable, and then ready to run their application. This shrinks their deployment time from many weeks to just a few hours. The total IT solution is also helping Super Micro and our customers to mitigate the impact of the global shortage, the supply chain disruptions, by accurately forecasting, building inventory and scale, and prioritizing with our strategic partners.
The system building block solution allows us to utilize sets of common subsystems 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 customers' time to market, which is crucial to their success.
The total IT solution is indeed a win-win-win proposition for Super Micro, 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 customer pre-configured, pre-validated rack powered by the latest technology from Intel, AMD, and Nvidia. We are also providing a hosted instance of plug-and-play cloud infrastructure with operating system and other tools that can be accessed remotely for development and testing.
The program will instill more confidence in Super Micro customers as it delivers the convenience, faster time to market, performance optimization, cost saving, and security. In summary, Super Micro 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 suite 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 our faster-growing 5S organized, are key to achieve our $10 billion revenue target. Third, replicating our market share success in the U.S. to APAC and EMEA with the completion of our new APAC campus in Taiwan.
Fourth, our new Command Center-based Autoconfigurator and B2B automation platforms are getting broadly used by customers around the world now, and they are accelerating our market share and customer satisfaction. In closing, I'm getting much happier with the progress of our business transformation, which is resulting in the acceleration of our business in fiscal 2022 and beyond.
As a total IT solution company, our tempo continues to increase as we invest our resources for growth. I am optimistic about achieving our $10 billion annual revenue goal in a much shorter schedule. With that, I will now pass the call to David Weigand, our CFO, to provide additional detail. Thank you.
Thank you, Charles. We continue 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 first fiscal 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 Super Micro'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-over-quarter. On a year-on-year basis, Asia increased 108% as we saw continued growth with both existing and new customers. Europe increased 60%. U.S. increased 13%, and the rest of the world increased 6%. On a sequential basis, Asia increased 29%, U.S. sales decreased 14%, Europe decreased 3%, and the rest of the world decreased 1%.
From this point forward, unless otherwise noted, I'll 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 of the 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 earnings per share totaled $0.58, which was higher than our midpoint 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 this 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 85-90 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 days to 41, while days payable 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-$1.2 billion. GAAP diluted net income per share of $0.60-$0.80, and non-GAAP diluted net income per share of $0.70-$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 Autoconfigurator 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 share-based compensation expenses.
This includes approximately $8 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. Higher forecast of $4.1 billion-$4.5 billion. GAAP diluted net income per share is expected to be at least $2.77 versus our prior forecast of $2.60.
Non-GAAP diluted net income per share of at least $3.20 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 for 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-$5 million. I'll turn it back over to you now, Nicole.
Operator, now you can open up the line for questions.
The floor is now open for your questions. If you would like to ask a question during this time, simply press star one on your telephone keypad. Again, that's star one. Your first question comes from Ananda Baruah of Loop Capital.
Hi, guys. Yeah, listen, good afternoon. Congrats and thanks for taking the question. I guess a couple from 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, you know, broadly that they're across the business. Could you maybe talk about you know what you saw that was you know most exciting for you and most incremental to the business throughout the quarter? Then I have a couple follow-ups. Thanks.
Yeah. Thank you. A very good question. Yes, as I share in last few quarter, we start to engage more and more large enterprise account, and we again see the more than handful larger account in last few quarters, including 5G telco, including AI machine learning, and including
HPC as well. Pretty much across broad range, we have more customer. With our B2B automation Autoconfigurator tool, as I just mentioned, now we are able to have sales engineer and PA to communicate with customer much more efficiently. Now we have more bandwidth to talk to more customers application in more detail. I believe we are continuing to gain customer and gain design win.
That's helpful context, Charles. Thanks.
Mm-hmm.
How would you characterize... Well, I don't even know if I wanna call it progress with the new Taiwan facility. Could you just, you know, describe for us the appropriate, like, how the appropriate context so that we can understand, you know, what the operation feels like right now, you know, both from a production perspective, but also from a revenue generating perspective as well?
Thank you for your question. As I share with you in last few quarters, the Asian campus production capacity is very important to our business. First, in USA especially, our operations have been pretty much focused on Bay Area in last 28 years, and it really costs too high.
We are very happy finally, we have a big campus in Taipei, Taiwan, and now we have a big capacity ready. Indeed, today we just utilize about less than 30% of the capacity. We have, I mean, a triple capacity available in Asia now. We are very happy, and we are starting to very aggressively engage customers in Asia and EMEA or even leverage the Taiwan capacity to support a customer in USA. That's a very positive change to us.
How long, Charles, any estimate on when you'll get the, you know, kind of normalized capacity utilization in the Taiwan facility?
Okay, good. Because of our 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, the number should be much bigger. At this moment, our utilization rate in Taiwan is about 30% or a little bit less, and we expect once the global shortage problem to leave, we will use 80%-100% the capacity in Taiwan almost, in a few quarters. We have a very strong demand and just need supply chain to be improved.
That's really helpful, Charles. I appreciate it. I'll get back in the queue. Thanks a lot for that.
Thank you.
Your next question comes from Mehdi Hosseini of SIG.
Yes, sir. 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?
We have a $200 million line of credit with Bank of America, and we also have over $300 million in credit lines in Taiwan as well.
Okay. Of the total 500, that's none of this is being utilized, right?
Yeah. We've, as you see from our balance sheet, you know, we're sitting at about $279.
Gotcha. Okay. Regarding the growth, can you, maybe Charles or anybody 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 the U.S., which is the largest market, had a double-digit growth, but Asia was up double-digit. What were the key drivers behind that growth?
Yes. Indeed, in Asia, we did not have a really strong promotion before because our capacity before was limited in Asia. A lot of the time we had to ship the product from USA to customers in Asia. That was our business before. Now with Taiwan capacity much bigger maybe, so we are very aggressively approaching customers in Asia, and indeed not just in Asia, supporting European customers from Asia also a very good arrangement.
We start to focus kind of our sales force in Asia. That's the major reason. We will continue to invest more sales and marketing team in Asia and EMEA, as well as in East Coast. Indeed, in USA, East Coast will be a very sweet spot for us as well. We just have a strong team start to focus on U.S. East Coast now.
Yes. Perhaps maybe if I rephrase the question, you highlighted three buckets of revenue, organic enterprise with OEM and the telco. Was there any particular end market that was particularly strong in Asia?
AI, for example, right? Telco, 5G telco, for example. Indeed, because our Asia market share was small before, so basically we have a lot of room to grow in Asia.
Got it. Thank you.
Thank you.
Next question, please.
Your next question comes from Nehal Chokshi of Northland Capital Markets.
Yeah, thank you, 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 the global supply chain issues have passed or not? Related to that, how long do you think it will be prudent to continue carrying more base inventory than typical?
Very good question and big question. As you know, we usually keep about $900 million inventory, and now grow to almost $1.3 billion. The reason why we grow inventory so quickly is because we want to make sure we are doing our best to support customers and to support our growth. We continue to improve our relationship with our supply chain, and it's really a big shortage, especially in our chips, right? Those I/O chip especially, a small chip, like what I mentioned before. And some CPU shortage as well. GPU, some slow delivery as well. We are facing lots of logistic delay.
However, because we are providing IP total solution now, so we're taking care all our difficulty portion and keep a complete plug and play direct solution to our customer. Most of our customer now very appreciate a direct scale a total solution. We just have to continue working with our supply chain to enable those shortage item and how soon can we fix those problem. It's really a global problem. People including myself, I guess maybe at least another three months to four months. Hopefully after that, things will be improving.
Great. Thank you for that perspective. Following on Mehdi's question regarding regional performance, helpful on what's driving Asia. David, you did say that, U.S. was down 14% Q2. Is that seasonal or is there something more going on there?
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.
Got it. All right. I'm gonna get back in the queue. There are also some good questions as well. Thank you.
Your next question comes from Aaron Rakers of Wells Fargo.
Yeah. Thanks for taking my questions and also congrats on the quarter and the guide. You know, just kinda dovetailing off the component question. You know, everybody's definitely seeing supply chain constraints. I guess my question on that is, you know, 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?
Yeah. I mean, as you may know, right, DRAM price is dropping now since last month or maybe two months ago. DRAM supply is getting a much better position than before. Other than DRAM, indeed most other components still have a big shortage. We foresee some IC price will continue going up. As you know, even TSMC announce that from November first some of their product line cost will increase to their customer. Overall, I feel things are improving, but won't be right away.
How are you reacting with your own pricing?
We basically pass through to our customer, wherever we can. Customer is getting used to this model because, you know, we just cannot afford to carry so much price risk. The customer pretty much understand that.
Yeah. In this environment, you know, a lot of companies have seen, you know, or requested maybe their own customers to provide, you know, 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, you know, maybe just this next quarter?
Yes. Basically, we hope so. The problem is we cannot deliver even our back order to date. That's why we did not push customer to place order much earlier. We hope they can more transparent to us about their forecast, about their PO. Yes, for sure. Again, the current back order indeed have been a big demand, and we had to fulfill that as soon as possible.
Yep. The final question, just kind of strategically, you know, I'm curious about is, you know, I think the company is fairly well-positioned, given your engineering, you know, presence and breadth, you know, around the role of AI and the proliferation of AI, you know, from a compute layer perspective.
Can you help us appreciate how material, you know, AI is? You know, I'm assuming that server platforms that are, you know, incorporating a GPU predominantly, how big that business is, how fast it's growing, and, you know, any kind of thoughts at a high level of how much that changes the richness of the mix of your business, on a, you know, AI optimized server relative to more of a traditional server.
Yeah. 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 compute system and some peripherals. I believe our market share still are pretty much top one or top two. I hope top one. I believe we'll continue to grow very strongly because we have been focused so much on those high-end products, including total solution, right?
AI total solution. We start to ship a kind of AI cloud to some of our partners. Again, that makes our customers job much easier. So, when we ship a rack to customer are able to just plug in networking cable, power cable, and pretty much ready to run their application. With a total AI cloud, total AI solution, I am very optimistic that our deep learning AI machine, even including our video streaming solution, will continue to grow very fast.
Very helpful. Thank you, guys.
Thank you.
Your next question comes from Jon Lopez of Vertical Group.
Hi. Thanks very much. Can you hear me all right?
Yes, Jon, we can.
Oh, great. Thanks, David. I had a couple of quick ones. I wanted to start on the inventory side as well. I apologize for doing that. If I remember correctly, I think your purchase commitments, your inventory purchase commitments as of June, excuse me, were up, you know, $550 million-$575 million, something in that ballpark, and it 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? Just given the size of those 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?
Yeah. As I think, the key is we're going into a seasonally strong December quarter. That combined with the fact that we've got to make sure we get in ahead of supply chain delays as much as possible has really driven our you know our decision to increase inventory levels you know up.
You know in the current market, with the delays both on the delivery side as well as on the production side, and you know the delays in you know containers you know making it to port, you've got to order earlier. We have to place orders in order to keep up with our customer demand. That's really. That's why we've increased our credit lines and used those to increase inventory.
Okay. Gotcha. Just off the top of your head, David, do you know where that number stood as of September?
No, I don't release that number on the quarter.
Okay. All right, great. Thanks for that. Oh, I'm sorry. Go ahead, please.
We'll have a little more color in the 10-K.
Sure. Of course. Your deferred revenue actually jumped up quite nicely. The current deferred was up like double digits, which hasn't really been the case for the last couple of quarters. Why was that?
Two reasons. Number one, we had some, you know, some customers who prepaid. Number two, we had some additional services that were, you know, an increase in services that we had to defer.
Okay. Gotcha.
Yeah. That's at this point, as I just mentioned, we start to focus on our 5S business, right? The software, switch, and service. Those products have a higher profitability, but, you know, they are also a generator of revenue.
Gotcha. 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. 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 and trajectory.
Sure. Absolutely. Our target model gross margin is of course 14%-17%. You know, we mentioned that, you know, 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 the operations people, it looks like that amount is starting to level off. The rates are leveling off. We are so the guidance that we give is to be up both in Q2 as well as, you know, in the second half.
Got you. Really helpful. Okay. Sorry, that said, is that leveling off a relatively recent phenomenon, or is that something that you observed through the course of the quarter?
That's just, I mean, there's only been, you know, 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.
Got you. Okay. I'm sorry. I just wanna take the prior quarter. They kept increasing through your fiscal Q1?
Yes. In other words, through Q4, they continued to increase. Then in Q1, they also increased another 30 basis points. Now, think about it's 30 basis points on lower revenues that the freight costs went up.
Yep.
I'm saying in the current Q2, we see that leveling off.
Got you. Really helpful. Sorry, my very last one. Just as we think about your fiscal 2022 guidance, you mentioned that both units and prices increased in your September quarter. Excuse me. I'm wondering, as we think about the sort of, you know, let's call it 20-odd% growth that you're building in for your fiscal 2022, can you give us a rough sense for how much of that is gonna come from pricing versus what's gonna come from units?
I think that's too hard to judge. Yeah.
Okay. Would your gut be that it's gonna be a combination of the two? Maybe I can leave it there.
Absolutely.
Okay. All right, great. Thank you very much for all the thoughts.
Your next question comes from Nehal Chokshi of Northland Capital Markets.
Yeah, thanks for taking my follow-up question. Great on the breakout relative to the three pillars of growth that you're laid out at your Analyst Day. Really appreciate that. Do you have color on how each of these trended on a year-over-year basis relative to the overall year-over-year growth?
Yeah. We're actually on the verticals. We're not going back on a year-over-year basis because we really started tracking this closely beginning with you know the fiscal year end. As each quarter now, we'll give a little bit more insight. I can tell you that you know 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.
Got it. Okay, great. What is the risk that the strong demand that you're seeing is a result of the supply chain disruptions and that you are having customers come to you, new customers come to you, in an effort to dual or triple source or quadruple source and effectively alleviate their own supply chain issues?
Yes, this is very important area. We watch very well. Most of our orders are pretty evenly come from our broad customer base. At this moment, I do not see any specific risk there. Pretty evenly come from many customers and from many different verticals. By the way, our building block solution, you know, my advantage is we can simply kind of reconfigure the system. Even if one customer slow down, we won't have to kind of really have a hard time for over-inventory.
Right. I think that latter point is an excellent point. Maybe to strengthen that up. Of the incremental demand that you're seeing, how much of that is coming in the form of a consideration that your competitors typically would not satisfy with their, you know, much more limited configurations that they could provide?
Yeah, indeed, I'm very happy to share. Most of our growth are from our building block solution. After we continue to emphasize our building block solution, indeed, most of the customers now prefer our building block solution 'cause it's easy to support their urgent demand and also less over-inventory risk for our sales and for themselves.
Okay, great. 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?
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.
Ah.
I'm sorry, in Q1. I said Q2. In Q1.
Yes. All right. Got it. Thank you very much.
Okay.
Your next question comes from Jon Tanwanteng of CJS Securities.
Hi, everybody. Thank you for taking my questions, and great quarter and outlook. David, I was just wondering if you could clarify the sequential increase in gross margins. What's driving 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 is coming from.
Sure, Jon. There's a number of factors. Number one, we expect to start gaining traction from our Autoconfigurator B2B, B2C solutions. We also have been exercising more price discipline and also we've, you know, learned, you know, how to manage, how to better manage the, you know, the passing on of freight charges and other things and other cost increases to our customers. That along with the, you know, some of the margins from our new product offerings give us a good little bit better insight into margin growth.
Okay, perfect. I wanted to touch on the Autoconfigurator and B2B you mentioned actually. What was the sales event through 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.
It will be very important, especially for our long term. You know, before we pretty much count on manpower, sales, FAE, and PM to work with customer one by one. Now, with intelligent database and our online facility are able to help customer figure out what's the best configuration, what is the best product for them, and then benefit through our commerce interface service.
Almost all our customer in sales who have ever used that system are very happy with the service. Shrink the time to communicate and make the communication much more accurate. The product optimization much more cost down and better performance. For midterm, long term, I'm very optimistic with Autoconfigurator, commerce interface B2B system.
Great. Maybe just the last one for me. What is the margin of sales through that channel compared to your regular sales? You know, maybe versus what it would normally have been.
We did not share the number yet, but basically, the profitability will be higher. You know, because, B2B Autoconfigurator, we are able to work with, many more customer, and especially lots of, middle-sized enterprise customer now. Before we can take care only large scale customer because we do not have enough manpower to take care of too many accounts. Now with automation help, we are able to reach to, many more, middle-sized enterprise account. For those accounts, as you know, the profit margin will be better.
Okay, great. Thank you.
Thank you.
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Oh, wait one moment, please.
Charles will do it.
Sorry, Charles.
Okay.
I apologize.
Thank you so much for joining us, and very happy to see you next quarter again. Thank you. Have a good day.