Super Micro Q2 2024 earnings

[wpr101]

Super Micro reported fiscal year Q2 2024 earnings with 3.66B of revenue and $5.59 adj EPS.

They increased their fiscal year 2024 guidance on revenue from 10-11B to 14.3-14.7. Note that they just reported Q2, so this guide is for the next two upcoming quarters. In Q1, they had 2.12B of revenue, Q2 is 3.66B and they estimate that Q3 will be 3.9B of revenue. This makes the following trend of revenue,

Q1’24, 2.12B (actual)
Q2’24, 3.66B (actual)
Q3’24, 3.9B (projected)
Q4’24, 4.8B (implied projected)

There were a fair number of questions from analysts what is giving the visibility of having the Q4 implied guide be so much higher. The basic explanation is they cannot meet all the demand currently but will be able to meet demand in the coming quarters. Two new production facilities are opening in the coming months.

The company has specifically called out they have one 26% of revenue customer and one 11% revenue customer. The 26% one is the same large one as before, but the 11% one is a step up from a smaller customer.

Gross margin has come down slightly but this has been planned by lowering some prices to gain market share and acquire as many customers as possible. Super Micro is even taking non-dilutive loans to increase production.

Some notes from the call,

• Improving supply conditions
• AI rack-scale solutions especially deep learning on Nvidia HGX H100 continued gaining popularity
• Entering an accelerated demand phase from many more customers wins
• “I feel very confident that this AI boom will continue for another many quarters, if not many years”
• Q2 revenue 3.66B up 103% yoy and 73% qoq, exceeded original guide of 2.9B
• High volume rack-scale production facility will be ready to service critical customer
• Add two new production facilities and warehouse near Silicon Valley HQ, which will start to operate in a few months
• The OEM appliance and large data center vertical revenues were 2.15B, up 175% yoy and 83% qoq
• Two existing CSP/large data center customers represented 26% and 11% of revenue
• Revenue breakdown of US 71%, Asia 18%, Europe 8%, ROW 3%
• Year over year, US increased 139%, Asia +89%, Europe -8%, ROW +68%
• Quarter over quarter, US +61%, Asia +191%, Europe +51%, ROW +37%
• Adj gross margin 15.5% down from 17%
• Adj EPS of $5.59 exceeded revised guidance because of operating leverage
• Demand is still stronger than supply
• In liquid cooling, leading the industry, have huge capacity ready and very mature solution
• Taking on new customers requires to be competitive and thus lowers gross margin
• In order to take market share, will take opportunities to be more competitive on pricing
• “Very large and growing backlog, which again grew this quarter”
• Our only constraint is supply
• Despite gross margin coming down, operating margin has improved quarter over quarter
• If we get more volume from a large customer, we are going to be able to bring more EPS to our shareholders
• Doing a lot in terms of expansion to lower cost
• Advantage of solution is with Building Blocks architecture
• Fastest to market because of the way the product is architected
• First to market advantage helps differentiate as they release a complete set of solutions
• 11% customer is not a new customer but the first time at 11%
• Do see top customers bouncing in and out, and happy anytime they bounce above
• Building very large capacity for liquid cooling and other green computing solution
• Capacity will be huge, when a customer needs it, will be ready
• New customers are accelerating growth
• Economy of scale is very important to operating margin and EPS
• We are in a good position to continue growing quickly
• Financial team diligently working to raise more capital without diluting stock, ready to raise more capital
• Reason cash flows were not as strong as last quarter it was because we grew by so much
• When you grow by over 1B in a quarter, you’ve got to have additional working capital
• Guidance implies annualized capacity of 19B revenue
• In December shipped 1.7-1.8B and that alone establishes 19B capacity
• March quarter is typically seasonally down, but guiding it to be up
• Guiding up because demand is “very strong”
• Believe March quarter will be strong as well
• Customer prepayments helping cash conversion cycle
• When economic scale grows, can leverage inventory as well
• Last statement of the call was, “Congrats guys”

Overall this was an incredibly impressive report and the market seems to be catching up to the results. Even with these numbers, they still have a growing backlog and cannot meet all the supply. In the coming months they expect to be able to ramp more supply and increase sales and profit.

[Aphalite]

I’m obviously very happy with my now oversized position after the 90% YTD growth. Not going to do any selling in the near future

A couple of things that concern me for the medium term (say 2-3 years out)

On building capacity:
I’ve gotten the sense from multiple earnings calls that the bottleneck in supply isn’t really their production/factory, but their ability to get chips from their suppliers NVDA and AMD. So even though SMCI’s production capacity will be huge, they will still be limited in terms of supply from the chip makers. We all already know this but this will always be a reason the valuation is depressed compared to other high flyers in the semi industry.

On customer concentration:
If rumors are true then the 26% customer is META, the 11% is probably another big tech company like AMZN/MSFT/GOOG/TSLA. The spending from the big companies are definitely driving this 100%+ YoY in revenue. I’m just wondering when the purchases will be done, since there’s no way META will continue to buy $1-1.5b of servers each quarter in perpetuity. Seems like the customer concentration will be something to watch for, but in this case, if the % starts decreasing, that’s a warning sign that we need to exit, since 100 new smaller customers still won’t combine to equal what META is spending this year (and maybe a year or two beyond)

On margin compression:
This one worries me the least since the pitch with SMCI was never that they would be able to expand their margins - lowering prices to get more customers is just fine in this stage of their growth, especially if they’re converting that to 100% YoY revenue growth. However, once META and the other big tech capex spenders are done building out their data centers, will they be able to increase their gross margin back up? I really doubt it. Imagine being a customer and being told that prices will increase 50% due to a combination of chip price increases from NVDA/AMD and also because we need to get GM back to 19% (obviously they won’t say the second part out loud). All this to say that when the bottom falls out in terms of growth rate, the rest of the financials will look really, really bad.

One saving grace is that they have shown that they keep operating expenses very reasonable, total SGA has barely increased in 3 years which is insane compared to the companies we’re used to - just look at the improvement in operating margin this quarter, and the complaints on glassdoor (overpaid employees don’t complain)

So all of this to say that I’m very much bullish for the next year at least, but am looking for any sign that I need to cut bait. Hardware market cycles in semis are as certain as death and taxes, and there’s no guarantee after the AI cycle is fully built out that there’s a “next thing” to get SMCI back on track. On the earnings report that things turn, it’s probably SMCI will drop 20-30%, I still need to remember all of the above and be ready to press the sell button.

But who knows, maybe AI will be built to the moon for the next decade and all of this caution will be unwarranted