超微電腦 (SMCI) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Super Micro Computer, Inc. First Quarter Fiscal 2021 Financial Results Conference Call. A press release issued earlier today is available on Super Micro's website at www.supermicro.com. (Operator Instructions)

As a reminder, this call is being recorded, Tuesday, November 3, 2020. A replay of the call will be accessible via webcast at ir.supermicro.com. A replay of the webcast will be available online for 12 months following the call.

An investor presentation and a transcript of management commentary related to Q4 results will also be posted at ir.supermicro.com.

With us today are Charles Liang, Chairman and Chief Executive Officer; Kevin Bauer, Senior Vice President and Chief Financial Officer; and James Kisner, Vice President of Investor Relations.

I would now like to turn the conference over to Mr. Kisner. Mr. Kisner, please go ahead, sir.

Thank you. Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the first quarter of fiscal 2021, which ended September 30, 2020. 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 & 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 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 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 2020 and our other SEC filings. All of 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 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.

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

Thank you, James, and good afternoon, everyone. Today, we have released our fiscal 2021 first quarter financial results. Now let's take a look and some highlights from the quarter.

Our fiscal first quarter net sales totaled $762 million, down 5% year-over-year and 15% sequentially. Our fiscal Q1 non-GAAP earnings per share was $0.55 compared to $0.68 in both the same quarter of last year and in fiscal Q4 of 2020.

As we expect, Q1 has been our seasonally low quarter after a traditionally strong quarter in June. This year, despite the continuing challenges from COVID-19, we were pleased to deliver revenue and earnings above the midpoints of our guidance ranges.

We have been efficiently adjusting to the new normal as a business deemed essential by the state of California, although there are still lots of areas can be and will be further improved regarding COVID-19 impact. At the same time, we have been aggressively growing our operations, R&D and sales functions in Taiwan, where the COVID-19 impact is much less than that in our U.S. and EMEA headquarters.

During the September quarter, we continued to serve our current customers while enhancing our Taiwan headquarters capacity and capability in production, operation and sales force in order to support our global growth strategy. To sum up, we now have a much bigger and lower cost campus in Taiwan with better productivity for revenue and profitability growth.

This is just the beginning of our turnover effort after recent challenges that I will discuss later. I believe, as our Taiwan campus starts to reach higher economy of scale combined with our cost reduction efforts, revenue and profitability growth will be getting much stronger in the coming quarters and years. I have confidence in capitalization on many new market opportunities in our approximately $100 billion TAM, especially in APAC, EMEA and the U.S. East Coast. We have been pretty successful at achieving a greater market share in the U.S. West Coast, and we aim to duplicate this success in other geographic territories.

Let me spend a minute to review our traditional business and the 3 new growth drivers that I stated in the past 2 quarter end conference calls. First, our organic enterprise and channel business. Second, our new large datacenter, public cloud and OEM business. Third, our new 5G, Edge and Telco businesses. And fourth, our software and global Telco business -- sorry, our software and global service business.

We have made good progress in each of the 4 growth drivers. We have added more new enterprise customer to our accounts and gained a couple of top scale cloud companies. We also have won a couple of top Telco partners in each of the EMEA, Asia and U.S.A. territories. Moreover, we see our software and service business continues to gain more adoptions worldwide. With the business foundation we have built and the customer pipelines we have nurtured, continued progress is expected in each of these growth areas going forward. Especially in the new large cloud and OEM and the 5G and Telco markets, I believe the growth will be a big extra revenue to us.

Before moving on to technology and products, I want to take a moment to recall and share the causes of our business slowdown and disruption over the past 3 years. First, our 10-K delay in June 2017 followed by our delisting was a significant distraction to management and employees for over 3 years. Although, all the concerns and issues were resolved a few months ago, this disruption had a lasting effect on our business and employee morale. However, we are recovering quickly now.

Unfortunately, just as we emerged from our stock delisting and resumed growth in December 2019, COVID-19 came to U.S. shores and has slowed down enterprise and channel spending badly, and that was our traditional focus. Our sales, operations and production performance has been impacted since the end of this March.

Regardless of these challenges and disruptions, I want to share with you that Supermicro is still very strong. Our strong foundation allows us to find ways to overcome these challenges. We stand alone as the only U.S. server hardware solutions company, with the longest record of faster and uninterrupted growth since inception.

In the 10 years between our IPO in calendar 2007 and 2017, we grew at a 20% compounded annual growth rate, well above that of the industry at about 3% compound annual growth rate over the same time period. Our investors should keep these facts in mind. We will prove that we are able to recreate the same growth trajectory or even better very soon.

Moving on to technology and products. Our unique Building Block Solution R&D organization is strong and smart at work to expand our product lines with extensive growth in our NVIDIA, AMD and Intel portfolios. Our broadest leading AI platforms and the coming soon new Intel Ice Lake product lines will prove that Supermicro, again, will be the true hardware industry leader.

Some technology highlights in the quarter include the followings. First, we introduced end-to-end PCI-E Gen4 based 1U, 2U and 4U AI systems that deliver 6x AI training and 7x inference performance improvement over previous generation. These AI systems are available with either the latest AMD EPYC processor or the upcoming Intel Ice Lake processors.

Second, most importantly, we believe our upcoming X12 IceLake product line is absolutely going to be the strongest product line in our history. It will be ready to ship as soon as Intel's new CPU is available. True to our application-optimization product strategy, our X12 product line will provide exactly the best hardware performance for 5G, AI and Telco as well as mega Data Center applications.

Third, we were also first-to-market with a 1U NEBS Level 3 certified NVIDIA V100 GPU accelerated server, a key enabler for the transition to 5G. And we also delivered the world's most energy efficient Supercomputer. Recently, by cooperating with Preferred Networks, our system achieved #1 in the Green500 with a record-breaking 21.11 gigaflops-per-Watt, which is 15% higher than the previous worldwide record. Given our leadership in Green IT, this is reflective of the deeper mission of our company: to help preserve our only planet for future generations with products that offer unbeaten energy efficiency.

Other than the 4 business growth drivers, our big production and operation capacity program in Taiwan, and our new strong product pipelines, the company is also investing in a business automation branch, which is our B2B and B2C online business transaction system. We started designing this system 5 years ago and have recently put extra efforts to finish the Phase I milestone. Now we are able to help our sales and our customers to easily select the product configurations and order quickly online.

This Phase 1 will be open to sales this November. After that, we aim to open it up to some of our customers in a few weeks. While we continue to fine-tune Phase I features and configuration optimization, Phase 2 has already been kicked off with a command center-based structure to further speed up and optimize sales performance and customer satisfaction. This innovative sales and services software program will dramatically improve our business efficiency, scale and quality.

In summary, we are back, and we will soon be much stronger than ever before. We believe that the big challenges in the past 3 years that badly hurt Supermicro are totally behind us now. As we continue to build a much stronger foundation globally, including the much larger new campus in Taiwan, we will leverage this investment to efficiently reaccelerate our business growth and profitability in the coming quarters and years.

I appreciate the patience that investors and our employee have shown to our company during the difficult time, and we aim to reward your support with our fast growth in the near future and long-term success. And I believe that we will become one of the top IT infrastructure provider very soon.

At the coming -- at the upcoming investor in May and Analyst Day, we will share more details about the scale, scope and schedule of the new Supermicro progress that we have been developing to grow into a top player.

The key topics will include: a, our 4 business drivers; b, our unique technology and new product lines for AI, 5G, Telco and Large Cloud and our organic business; c, our new campus in Taiwan to lower our business cost; d, our software and service business status; and e, our B2B and B2C business automation program. Welcome to join us at that time.

I will now pass the call to Kevin Bauer, our Chief Financial Officer, to provide additional details on the quarter.

Thank you, Charles. Our fiscal first quarter revenue totaled $762 million. This reflects a 5% year-on-year decrease from the same quarter of last year and a 15% decline from the fourth quarter of fiscal year 2020. Systems comprised 81% of total revenue and volumes of systems and nodes shipped were down sequentially and year-over-year. System ASPs increased quarter-on-quarter and year-over-year.

Turning to geographic performance. On a year-over-year basis, the U.S. increased 6%, EMEA declined 12% and Asia declined 22%. On a sequential basis, U.S. sales declined 8% quarter-on-quarter, EMEA declined 32% and Asia declined 22% sequentially.

From a customer point of view, we saw pauses at OEM, cloud service provider and internet commerce customers following strong demand in the June quarter, coupled with the normal down cycle of demand from large enterprise customers. This was offset by first time business at the new high-profile customers that Charles referred to earlier.

From this point forward, unless otherwise noted, I will be discussing financial metrics on a non-GAAP basis.

Working down the P&L., Q1 gross margin was 17.1%, up 70 basis points year-on-year and 310 basis points quarter-on-quarter. Recall, on our August earnings call, we stated that we expected gross margin to improve by 75 to 125 basis points on a sequential basis, chiefly due to a reduction in what were highly-elevated commodity and freight costs.

As anticipated, we did see improvement from these factors. But also, we accrued for a recovery of costs paid in prior periods that benefited this quarter by roughly 130 basis points.

Turning to operating expenses. Q1 OpEx on a GAAP basis decreased 13% quarter-on-quarter to $99 million. Recall, last quarter's GAAP operating expenses included $16.2 million in one-time incentive awards to our employees. On a non-GAAP basis, operating expenses increased 4% quarter-on-quarter and 10% year-on-year to $95 million. The sequential increase in non-GAAP OpEx was primarily due to the fact that Q4 operating expenses benefited from a bad debt recovery of $4.8 million.

Other income and expense, including interest expense, was a $1.5 million loss as compared to a $1.3 million loss last quarter. This quarter, our tax expense was $3.7 million on a GAAP basis and $4.8 million on a non-GAAP basis. In both cases, this quarter benefited from larger tax deductions related to stock-based compensation. Our non-GAAP tax rate was 14.1% for the quarter. Going forward, we expect our tax rate to approximate 16%, slightly below our prior expectation of an 18% rate.

Lastly, our joint venture contributed income of $1.3 million this quarter as compared to income of $3.5 million last quarter and income of $1 million in the same quarter a year ago.

Q1 non-GAAP diluted earnings per share totaled $0.55 as compared to $0.68 in both the same quarter of last year and in the fourth quarter of fiscal 2020. Cash flow from operations totaled $120 million, driven from an improvement from cash flow from operations of negative $96 million in the June quarter, driven largely by changes in working capital. CapEx totaled $12 million, resulting in free cash flow of $109 million.

Our closing balance sheet cash position, which excludes restricted cash, was $300 million, while bank debt was $36 million, resulting in a net cash balance of $264 million. And I'll remind everyone that we completed our previously announced $30 million share repurchase program before the quarter end, wherein we purchased 1.14 million shares at a weighted average price of $26.24.

In our earnings release today, we concurrently announced that our Board of Directors has authorized the company to repurchase up to another $50 million of its common stock in a new share repurchase program. The program is effective until October 31, 2021 or until the authorized funds are exhausted under a 10b5-1 plan, whichever occurs first. We are currently taking a tactical and opportunistic approach to share repurchase as we fine-tune our longer-term capital allocation strategy.

Turning to working capital metrics. Our Q1 cash conversion cycle was 170 days, up from 87 days last quarter and outside of our target range of 85 to 90 days. While the absolute level of our inventory declined, days of inventory at 118 days remains elevated relative to history, given the lower sales level quarter-on-quarter. And Days Sales Outstanding was 44 days, while Days Payable Outstanding totaled 55 days.

Now turning to the outlook for our business. The company expects net sales for the quarter ending December 31, 2020, in the range of $780 million to $880 million. We expect gross margins to decline approximately 160 to 200 basis points sequentially due to the cost recovery discrete event mentioned earlier and higher overhead costs driven by an expected increase in freight.

We expect non-GAAP operating expense level to be flattish quarter-on-quarter. While we're selectively investing in R&D, this was offset by lower audit costs and actions we took very late in the quarter to selectively reduce headcount. We anticipate the GAAP and non-GAAP tax rate to be 16% going forward. We fully expect GAAP -- diluted GAAP EPS to be in the range of $0.25 to $0.47 to fully diluted non-GAAP EPS to be in the range of $0.35 to $0.58.

We now expect our CapEx for fiscal '21 to be in the range of $55 million to $60 million, inclusive of the acceleration of the Taiwan building project mentioned earlier by Charles.

In the meantime, we remain focused on guiding the company through the volatility presented by this resurgence in COVID-19 and ardently rebuild our business momentum as described by Charles.

With that, I'll turn the call back to James for Q&A.

Thank you, Kevin. Operator, we are ready to take questions.

(Operator Instructions)

Your first question comes from the line of Jon Tanwanteng with CJS Securities.

My first one is, I think you guys mentioned Internet and cloud as a source of strength in your Q1 results. Can you talk a little bit more about that end market, the margin profile and the revenue impact of these customers and how they factor into your guidance for the next quarter?

We're having trouble hearing the question. I don't know if it's -- whose line it is. We can barely hear, Jon. Jon, can you speak up a little bit? Please, repeat the question.

Yes, is this better?

Yes, much better.

Here we go.

Okay. Great. I was saying, you mentioned cloud and Internet as a source of strength in the quarter. I was just wondering if you could talk about the margin profile of those customers and how they factor into your guidance going forward.

Sure. So this was kind of our first taste of some of these customers. I would say that fortunately, as opposed to what some might think our margin profile was not appreciably different from the margin profile of our other customers. So we expect and hope that, that will hold true on a go-forward basis as well.

Got it. And then can you talk about maybe the -- how you see market demand developing over the next 2 quarters, with the relative puts and takes, whether it be COVID, election concerns and new form launches and new product launches that you're doing internally?

Yes. It's hard to predict. But as you may know, right, enterprise and channel business may continue to decline gently. And at the same time, the cloud, social networking, communication, video streaming demand still keep strong. And that's why we have created some big customers in large cloud and video streaming territory. So we start getting some demand from that territory. And that's why our Taiwan operation manufacture in Taiwan, especially for lower cost, will help us a lot.

Great. That's a good lead off into my next question I was going to ask, about the Taiwan acceleration and how it better positions you both strategically. And maybe if you go into it, how much can you quantify the expected benefit from moving there over maybe the nearer term?

Yes. Let me start, and Kevin may follow. So I mean, it's investment for, I wouldn't say, short term, midterm and long term. So this year is in Taiwan, cost is much lower than in our USA operation. Basically, it's about 35% to 50%. So for mature products benefited, we should greatly leverage the possibility the capacity in Taiwan.

And with COVID-19 hit U.S.A. much worse than in Taiwan. In Taiwan, indeed, almost no impact. And that's why we quickly leverage our Taiwan operation advantage. And I believe it will be good for our short-term and gradually advantage have become much clearer and much more significantly in mid-term and long term.

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

Congratulations on great results all around, especially the strong free cash flow and executing on the share buyback. You guys mentioned that you noticed areas of recent improvement that gives you confidence that year-over-year growth is bottoming here. Can you discuss exactly which areas are you seeing that recent improvement in? And from what point in time are you referencing as well where that demand profile has improved?

So I think we just navigated a period that was challenging. We kind of gave some guidance in terms of how we think that it is gently going to improve in the December quarter here based upon visibility that we have. I think also, when we talked about some of those new customers, some of the lead times for their materials are longer in length such that we get a little bit better in visibility as to their plans for the March quarter.

And so therefore, I think at some of those speeds of information that make us believe that as we continue to accelerate quarter-by-quarter, that there is some tangible evidence of people's plans, not perfect visibility, but there's some that's out there to be able to latch on to. I don't know if you have anything else in addition to that, Charles.

Yes. Likewise, I just mentioned, I mean, in last quarter, I mean, especially after the impact of COVID-19, we started to focus on large accounts, high-profile, high-volume accounts for a large cloud, a large Data Center and video steaming customer, for example, 5G and Telco.

And we started to gain some very good partnerships, and we started to ship some. And -- however, really high volumes, it takes some time to ramp up. So like Kevin say, I mean, at December quarter, we will see some help, March quarter and next year June quarter, I believe, we will see a much bigger help.

Yes. I thought of one thing that could help the investment community understand that a little bit better is that some of these new customers are actually ordering rack scale products from us that with that longer lead time, give us some visibility.

I see. Okay. And second question I have is that a nice slide here on your key vertical markets and growth drivers. I think this is a bit of an evolution of the Supermicro 3.0 vision that you guys had. Previously talked about. And within that Supermicro 3.0 vision, implied in that was a potential for margin expansion. In this new way of presenting it, does that opportunity still present itself? And can you talk a little bit about how that might actually look in terms of a long-term margin profile?

Yes, very good question. I mean, we mentioned about Supermicro 3.0 about 3 years ago. Unfortunately, a 10-K delay that delayed the outcome of our project.

The good thing is now it's all over, right? So we start to execute our Supermicro 3.0 now strongly, for example, the 5G, Edge and Telco business, software and global service, so that has been helping our business, and will become a much significant help quarter-over-quarter. As for our large Data Center and cloud, even private cloud businesses has been growing, and we will continue to invest in that area. So it should be a very significant business driver for us in short-term income and even long term, especially long term, I would ever say.

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Sorry, James, I was on mute. I just wanted to ask a question about server cycle. You referenced in your prepared remarks, Intel's Ice Lake. You also have AMD's Milan processors. It sounds like you guys continue to see overall ASP increases in your system sales.

How are you thinking about like Intel with 8 channels of memory from 6? How do you think about the ASP trend relative to unit growth as you think about the setup in the calendar '21?

Yes. More and more customers now really appreciate our total solution, not just Pericom by the CPU memory hard drive and total solution, including management software, including some even applications software. So including a special memory, right, that is why we mentioned kind of SSD, NVMe.

And total solution has been our long-term goal and complete the Rack solution. And very soon, we will share with you even more about our private car total solution. But it's a little bit too early to say too much. But yes, we are moving forward to a total solution.

Okay. And then maybe sticking on a similar topic, gross margin was very strong this quarter, up quite a bit on a sequential basis. I'm just curious of what you're seeing on the component pricing environment. What are you embedding in your current quarter expectations as far as DRAM and flash pricing trends? And any thoughts on how that sets up into next year?

Yes. I mean, economical scale will help us. So we are growing global now and with new business drive, that will grow our revenue, our economic scale, and that will have our gross margin and net margin for sure. At the same time, the service business, the software value is getting help to our profit as well.

Your next question comes from the line of Nick Heisler with SIG.

It's actually Mehdi Hosseini. I have a couple of follow-ups. Kevin, can you help us understand how OpEx is going to play out for the rest of the fiscal year '21?

Sure, Mehdi. So I think we said that we took some actions in this quarter. We trend some headcount, we actually did a similar kind of trend at the end of September that kind of bore fruit here in the December quarter.

I think, as we look forward in terms of the pace of our hiring, as Charles has mentioned earlier, if we're going to appreciably hire anyone that's going to be Taiwan-based over the course of time. I think our views of OpEx now on a non-GAAP basis is that, I think, we said quarter-on-quarter, somewhat flat, may drift a little bit in the March or June quarter if COVID lifts, and we feel that it's appropriate to give merit increases. But I think we're trying to hover in the mid-90s for a period of time here, and I think that's what you were looking for.

Yes. Got it. And then 2 more questions. One for Charles. Given your expansion in Taiwan and how CapEx effectively increased by 2 to 3x over a 2- year period. In the meantime, you have been able to diversify and target a wider range of end market.

How should we think for envision opportunities. In the past, you used to give us a $3 billion revenue target. You're already there. I'm not asking you if you're going to double your revenue, given the increase in capacity. But in the longer term, it seems to me that you can hit revenue CAGR that could be more of a double-digit growth given that 2 to 3x increase in CapEx over the next -- over the last 2 years. Is that the right way to think about opportunities in the next 1 or 2 years?

Yes. I mean, a very good question. I mean, as you may know, right, I mean, our DNA, I mean, since 2000 -- year 2000 to 2017, pretty much, our yearly compound growth has been about 20% yearly, right? So I don't believe we won't return to that growth rate or better, right?

We'll taken the delay behind us. And although COVID-19 is challenging us, but now we enable Taiwan operation, the opportunity in Taiwan with lower cost with almost no COVID-19 impact. I feel very confident we will get back to a 2 digit growth yearly very soon.

Hopefully, not just 2 digit, hopefully, we can have -- no reason we cannot get back to more than 20% or 30% growth yearly. So I have a really good feel and very excited to -- in the next few years at least.

Okay. And hopefully, it will be with a higher-margin business. And in that context, Kevin, how should I think about either absolute utilization rate for U.S., San Jose versus Taiwan? Or if you don't want to disclose a specific utilization rate which region is higher. I'm comparing U.S. San Jose to Taiwan?

Well, right now, the U.S. utilization is higher. I think you heard in my prepared remarks that at the current time, Europe and Asia are suffering a little bit more than the U.S. because the U.S. was the location where we got these new marquee customers.

But I think on a go-forward basis, that capacity utilization needs to obviously increase, and we'll get some leverage off of that. I think it's also fair to say that with -- the U.S. building is not under active construction at the moment. We're taking a little bit of a pause with it where we're moving forward with the Taiwan building. I think once those both get built out, we may have capacity to, on a full tilt basis, almost get to like $6 billion.

So we would be building that over the course of time as necessary. I'm just talking about the Shell and its capabilities. But that's the kind of profile, I think, that we're looking at, to answer your question.

Yes, indeed, to reach $6 billion, our cap investment won't increase too much. Because the facility capacity pretty much ready here.

Yes. So that kind of describes, and in previous calls, I talked about how after we get these buildings done, then our CapEx is going to go back to the modest maintenance. And now you have an understanding of where that's going to be.

Your next question comes from the line of Ananda Baruah with Loop.

A few for me, if I could. Just to start, how should we think about the drivers in the December quarter could you tell us what you think the biggest aspects of your business are that will influence the incremental sequential revenue in the December quarter?

With COVID-19 (inaudible) us, we try to be conservative. So today, we give a range of $780 million to $880 million, I hope it's a conservative number. And again, that's why we just mentioned, we are gaining a high-profile customer in a large cloud, 5G, Telco and video steaming all kind of business. So I believe next few quarters should be our good quarter to grow.

Yes, I think, Ananda, also, we're going to see some return of the customers that took the pause in September.

Got it. Some of the more classic on-prem trends, it sounds like. Isn't that right, Kevin? And Charles, I appreciate your comment about...

I gave a long list of expected customers, including OEMs and such. So its broad.

Got it. And just with regards to Ice Lake, and I don't want to make -- I don't want to stitch things together that aren't intended to be stitched together. But in the prepared remarks, yes. I think it was Charles, you made mention of slight improvement in December.

And then it sounded like kind of in the first half of next year calendar or maybe kind of in first half, a stair step kind of take up. That -- those are my words, but that sounded like the spirit of it. And I guess the question is, to what degree does the availability of Ice Lake play in that relative to just demand you think can get better regardless of Ice Lake, Ice Lake or not?

Yes. As you may know, right, Intel Ice Lake now can be available very soon, end of this year or early next year. And we have the strongest product line ever, all available now once the Intel CPU production will be ready to ship in terms of even product line. So we are all ready.

And it sounds like you think that will have a pretty significant impact when availability occurs.

Yes. We are waiting for the new CPUs to be available.

Okay, great. And just a linearity question, how did you guys experience it this quarter? And what are you seeing in this month to start December quarter? So how do you experienced in the September quarter? And how does -- how do you feel about sort of November -- sorry, October so far in the context of linearity?

You mean in terms of Ice Lake or overall business?

Overall, overall.

Overall, I believe for the business, we'll be getting stronger, getting better for us for a couple of reasons. Number one, we just created some very high customer in the last few months. And those ramp-up is pretty predictable.

And second is our Taiwan operations is getting ready, and we just grow some strong team in Taiwan, those teams are ready to grow. So we have a very good feeling in the near future, especially next calendar year. Should be a strong year for us.

(Operator Instructions)

Your next question comes from the line of Jon Lopez with Vertical Group.

I just want one clarification, Kevin, if I could, which is, deferred the last couple of years had trended up pretty nicely. It's kind of flattened out over the last couple of quarters. I'm wondering, is that just because unit volumes have dropped off and is it just a function of attach or is there something else influencing that line item?

Well, there's some attach, but it's also true that contracts that we entered into in 2018 through early part of 2019, if you recall, had very elevated commodity costs. And the car for the service as a percentage of revenue.

So we had some more expensive contracts historically. I think we do want to continue working on our attach rate. We do better in some regions than the other, and we need to work on some offshore attach rates to be frank.

Got you. Okay. That's really helpful. Secondly, I'm wondering if you could just rewind a little bit. My recollection, as you guys exited the prior quarter like calendar Q2 was that the bookings activity had slowed pretty sharply.

Can you just walk us from there to here? Was there a pretty appreciable increase in bookings activity? Did that occur pretty linearly? How does that look exiting calendar Q3 versus, say, exiting calendar Q2?

It's gotten healthier. I mean, hence, the guidance.

Fair point. Okay. 2 more quick ones, if I could. My recollection is cloud, if you look back a couple of years. I can't remember what you guys called it back then maybe Internet Data Center, but it was around 20% of the business or oscillated around that level. Can you guys give us just a rough sense for where that sits now?

Yes. We still are not splitting out our revenue segments right now. But I wave that the topography of it is quite different now. And that is that back in the day that you're referring to, it was a pretty large, greater than 10% customer, where we're greater diversified in that segment right now.

Got you. And just on that point, Kevin, is the right way to think about this that you guys are, I mean, for lack of a better term, kind of reentering that vertical. Maybe just talk a little bit about what you guys are perhaps doing differently now.

Are you -- it sounds like perhaps diversifying the customer base is one thing. Are you guys pursuing different use cases? Is there may be a bit more geographic spread here? Maybe just talk for a second about how you think about that vertical now versus perhaps how you did, say, 2, 3 years ago?

Maybe I can share. I mean, we saw our facility in Taiwan getting bigger. And of course, it is much lower than our operation in U.S.A. this year. So with that advantage, now we will start to approach that market much more aggressively than the last few years. So in the other words, we will actually focus on that territory very soon.

Your next question comes from the line of Jon Tanwanteng with CJS Securities.

Just a quick follow-on to that question. Is it fair to say that it's the cost advantage of moving to Taiwan that is enabling you to win those customers at this point versus whatever else you may be bringing to the table?

Yes. Because those large Data Center, No. They buy a lot, but they want a more aggressive price. So with our Taiwan operation, now we are much ready to service customers like that.

There are no further questions at this time. I will turn the call back over to Charles Liang.

Thank you a lot for joining us today, and looking forward to seeing you, of course, hopefully very soon, and have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.