Here we are in 2023, spoiled by the best Nasdaq performance in the history of the index. 2022 seems like a distant memory. Well, Super Micro’s earnings are here to remind us that stocks do not go up forever, even on a nearly perfect earnings report.
I will take this opportunity to make a plug for technical analysis, as Super Micro due for a pullback from some time, per Knox’s Positions Report here. There is very little in the fundamentals that would directly cause a selloff, and so the information below is going to frustrate anyone who thinks only fundamentals drives stock prices.
Super Micro beat on all accounts, and also raised full year guidance. Cash flow was negative this quarter but likely to be temporary. I’ve included some notes on this below.
We had written going into the earnings report that Super Micro had pre-announced Q4, and it was a sizable beat:
Today, the company has taken this further and raised FY2024 guidance considerably from $8.61 billion expected to $10 billion at the midpoint. Rough math of a 17% gross margin and a 9% net margin gets us comfortably above the $14.73 EPS expected for FY2024, as well, in the $16.00 adjusted EPS to $17.00 GAAP EPS range.
Management did a good job on the call discussing what would cause them to raise the guidance even more for FY2024. The brief answer is they will raise again if they can obtain key components from the supply chain. I detail this for you below.
Scorecard:
The current fiscal Q4 results are bolded for easy reference. Percentages are YoY unless stated otherwise.
Revenue and EPS:
- SMCI Management raised Q4FY23 revenue guidance to $2.15B-2.18B from previous guidance of $1.7B to $1.9B, vs consensus of $1.96B. Today, the company reported $2.18 billion for growth of 34% YoY and 70% QoQ.
- Q4 GAAP eps guidance raised to $3.25 to $3.35 from $2.13-$2.65. The company reported $3.43 GAAP EPS.
- Non-GAAP guidance raised to between $3.35 to $3.45 from $2.21 to $2.71 vs consensus of $2.88. The company reported adjusted EPS of $3.51 for growth of 34% YoY.
- Q1FY24 consensus eps of $3.19. The company guided for $2.75 to $3.50 EPS, so this is technically a slight miss at the midpoint of $3.13 EPS but the guide is still within range.
- FY24 consensus eps of $14.51 and revenue of $8.47B. The company raised full year guidance to $9.5 billion to $10.5 billion, or $10B at the midpoint. This implies a comfortable beat on the bottom line with the current margin profile.
Margins:
- Current gross Margin of 17% versus Q323 gross margin of 17.6% and 18.7% in Q223
undefined - Current operating margin of 10.60% versus Q323 opm of 7.7% and 11.9% in Q223.
- Current net margin of 8.9% compared to 6.7% last quarter and 9.8% in Q2
Cash Flow:
This quarter, the operating cash flow was (-$9) million and free cash flow was (-$17) million for a 0% margin. This compares to $198m in op cash flow and $190m in free cash flow last quarter with margins of 15.5% and 14.8%, respectively. In Q2, the margins were 8.9% and 8.4%, respectively.
The cash flow was also negative in Q4 of last year. Management stated the following regarding the negative FCF: “Cash flow used in operations for Q4 was $9 million compared to cash flow generated by operations of $198 million in Q3 due to higher accounts receivable, offset by lower inventory and higher accounts payable from backend loaded shipments in the quarter due to supply constraints.”
The company has $440 million in cash and $290 million in debt for a net cash position of $150 million, down from $176 million. Per management: “we utilized our bank lines of credit to support higher revenues and accounts receivable as we ramped up production of new AI/GPU design wins.”
Here was a question on the call, which seemed to relay that cash flow would be similar to previous levels:
Jon Tanwanteng
Hi, thanks for the follow up. Dave, I was wondering if you could talk about your working capital needs in the sort of environment. Can you generate positive cash flow going forward? Are you going to be using cash as you as you try to fulfill this OpEx demand?
David Weigand
Yeah, John. We see the business generating good cash flows, as it has historically. And we think that the — especially in this constrained supply market, where we could deliver more if we had more supply. But we're so really, the constrained supply ends up moderating the working capital. And so we grew our business last quarter quite a bit and grew our ARR. So that utilized a lot of working capital, but we have no concerns about working capital.
Key Metrics:
52% of Super Micro’s revenue is driven by AI-related designs. Compare that to many AI bubble stocks that do not have any AI revenue yet.
To help illustrate what that has done for Super Micro, analysts raised FY 2025 expectations from 11% revenue growth to 71% revenue growth over the past three months. That is a considerable jump thanks to it’s here-and-now AI exposure.
The OEM appliance and large data center revenue of $1.17 billion grew 59% year-over-year and 94% QoQ. The boom in AI-related data center sales helped to push this segment to over 100% growth in FY2023.
The Enterprise and channel vertical, which also includes AI/ML revenue, was up 19% year-over-year and 51% QoQ to $976 million.
Earnings Call:
Supply is the Primary Headwind; Not Demand:
When management raised guidance, this is what the CEO stated: “However, given the record high backlog, we see fiscal year 2024 revenue between $9.5 billion to $10.5 billion with room to deliver more depending on availability of supply.”
Basically, Nvidia’s chips are so popular that Super Micro is competing with many others for a very limited supply of these chips. Super Micro has a strong relationship with Nvidia and the company is not bashful about making it known. Here is what was stated in the opening remarks: “Couple of months ago, I was honored to have my close friend, NVIDIA CEO Jensen Huang, join me on stage at Computex to highlight our optimized new generation GPU solutions for this AI era” along with a list of Nvidia-powered systems that Super Micro supports.
In our pre-earnings write-up, we had stated: “The bulk of SMCI’s growth will depend on supply chain, which we outlined in our recent analysis. The demand is there, can the company meet the demand or are the key component supply shortages going to keep the company’s growth in line for now? Clearly, the pre-announcement is a good sign that the supply chain is not getting in the way too much, however, this remains the top concern for SMCI's near-term growth. Per our analysis, lead times are at 26 weeks compared to a 10-14 week target. This is an improvement from 40 weeks. Read more here.”
Here was the first question regarding the supply:
Ananda Baruah:
“[…] And so I guess the first question is, is what's the opportunity do you see to maybe even do teach stronger than the fiscal '24 guidance. I guess, what would be the puts and takes there? And, if you were to be able to exceed the 2024 guidance, what would be some of the things you think would need to occur?”
Charles Liang
“[..] And for sure, they need 10 times 20 time more system. And we just cannot ship at this moment, because of supply chain […] So I mean, we are on the right track, yes expecting supply chain can improve so that we can grow our revenue.”
Can the Company Keep Growing …
As if a beat in Q4 and a raise for FY2024 isn’t good enough, analysts on the call wanted to know what the possibility is that Super Micro continues to beat and raise. It was helpful that the CEO stated, “With LLM large language model and other AI applications booming, I now expect the $20 billion annual revenue target to be just a couple of years away.”
Here was a question from an analyst on that note:
Ananda Baruah
That's really helpful. And so, Charles, just to make sure that I understood that accurately, is that to say, if the supply chain — so if you can, if you can get more from the supply chain, actually use it to say this way you have order visibility, such that if you can procure more, you would have the ability to share gains, exceed the fiscal '24 range that you provide is a really supply chain issue, I guess, is what I'm asking. Did I hear that accurately?
Charles Liang
Yeah, absolutely […]
This was also stated at the very end by the CEO:
“Charles Liang
And even a supply condition, I believe we can surpass $10.5 million for sure easily.”
Conclusion
On the Microsoft post-earnings report, I had stated “Let’s be real, the Nasdaq has rallied more than it has in its 52-year history off fairly unimpressive top line growth in the tech industry and minimal to no earnings growth. Although fellow growth investors have greatly benefited, we shouldn’t be surprised if the buying is exhausted at the moment.”
Per a recent Zack’s report (behind a paywall): “For the Tech sector, we now have Q2 results for 41.2% of the sector’s total market capitalization in the index. Total earnings for these companies are down -0.4% on +2.1% higher revenues, with 94.7% beating EPS estimates and 73.7% beating revenue estimates.”
This is not enough growth to sustain the rally we have seen.
Of the tech earnings results this year, Super Micro is a rare gem that has materially grown both top line and bottom line in a big wayin a big way. But, to be fair, the stock has been rewarded and is up considerably this year. Tech investing is not linear, and so what we have is a solid earnings report that is being sold off as buyers are drying up and/or investors are taking gains.
From my perspective, this is a great report and stands out from the weakness we are seeing in many earnings reports. Our plan is to buy on any weakness using technical analysis, so you can look for those trade alerts when the stock hits our buy zone.