Astera Labs reported an impressive beat and raise in Q1, with GAAP margins strengthening as revenue continues to grow at a triple-digit rate. On top of this impressive beat, the growth story for Astera Labs is only beginning. The commentary regarding their product diversification and higher dollar content going into the second half of the year was quite clear as to the growing opportunity this company is poised to capture.
Primarily, Astera offers unique positioning that allows them to capture both the merchant GPU market and custom silicon market across its three products lines Astera, Taurus and Scorpio. This widens the TAM and allows for steady revenue growth despite hiccups or delays from a single AI system (which we’ve seen plenty of disruption recently across those with high customer concentration with Nvidia).
In addition to being a strong custom silicon vendor for hyperscalers, Astera will participate in Blackwell once it (finally) ships in volume as the company offers PCIe scale-out and Ethernet scale-up. Their new products Scorpio P-Series and Scorpio X-Series are fabric switches that are particularly well-suited for the immense demand that is expected for customization of racks as architectures scale-up in the second half of the year and beyond.
Notably, Aries PCIe retimers and Taurus Ethernet smart cable modules are driving the revenue today with the Scorpio P-Series beginning to ramp. However, there are many catalysts on the horizon for Astera which adds to the trifecta of a strong growth story:
- Serving both ASICs and GPUs greatly increases TAM and diversifies revenue; rare in the AI systems ecosystem
- Preparing to serve the scale-out demand with increasing higher dollar content; specifically on Scorpio but also on Aries
- Offering strong cross-sell opportunities as it aims to be the first to solve unique challenges for both GPU and custom silicon utilization – and is solving these issues in a way that avoids vendor lock-in for the large hyperscalers who want a mix of both custom silicon and merchant GPUs (Nvidia or AMD).
Below, we look at Astera’s exceptional earnings report and provide notable commentary as to why Astera’s streak is likely to continue for some time.
Revenue Grows 144% in Q1
Astera Labs reported a blazing 144.3% YoY revenue growth in Q1 to $159.4 million, topping analyst estimates for $151.5 million in the quarter. Management said they witnessed strong demand for PCIe scale-up and Ethernet scale-out solutions for custom ASIC platforms, with initial shipments starting for its Scorpio P-Series and Aries 6 retimers in merchant GPUs.
For Q2, Astera delivered a solid raise at $170 to $175 million, more than 7% ahead of the $160 million estimate. This points to YoY growth of 124.5% at midpoint, ahead of estimates for just 108% YoY.
Astera has seen revenue growth decelerate over the past few quarters, with growth expected to continue decelerating as Astera laps its rapid ramp quarters. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter.
For the full-year, Astera did not provide a guide, though estimates heading into Q1’s report were pointing to 70.4% YoY growth to $675.2 million in revenue. However, given that Q1 and Q2 have combined for a $20 million beat compared to current estimates, it’s likely that full-year revenue estimates will likely move closer to (or above) $700 million in the coming days. This would correspond to YoY growth of nearly 77%.
According to discussions on the call, management is being conservative in their guidance, stating they have more visibility than most as they are closer to their lead GPU customer (Nvidia) with hints that the larger systems will start shipping preproduction volumes at the end of this quarter. “I think the — so we will always continue to be conservative, just to underline what Jitendra said. But having said that, the revenue models and the guidance that we are providing or the outlook that we're sharing comprehends all this because we are so close to this customer that we see a lot of stuff, and we're able to consider and contemplate that when we provide guidance.”
Margins: Astera Becomes GAAP Profitable
Astera is making considerable progress on strengthening its GAAP operating margin, having guided for a (0.2%) margin in Q1 but reporting a 7.1% margin. This also marks a strong 15 point expansion in just 2 quarters. Elevated SBC at nearly 28% of revenue in Q1 is behind the wide disconnect between GAAP and adjusted margins, though it signals strong GAAP profitability potential in the coming quarters/years as revenue continues to scale.
- Q1 gross margin was 74.9%, ahead of guidance for 74%.
- GAAP operating margin was 7.1%, well ahead of guidance for (0.2%) and up from 0.1% in the prior quarter. Adjusted operating margin was 33.7%, up more than 14 points from 24.3% in the year ago quarter but down from 34.3% last quarter.
- GAAP net margin was 20%, expanding nearly 30 points in three quarters. Adjusted net margin was 37.4%, up more than 15 points from 22% in the year ago quarter but down nearly 10 points sequentially.
Astera is guiding for margins to remain strong in Q2, with GAAP operating margin expanding. Gross margin was guided at 74% once again, while GAAP operating margin is forecast at 7.9%, up 0.8 points sequentially. Adjusted operating margin is forecast to contract 2.6 points QoQ to 31.1%.
The company foresees gross margin being stronger in the second half, yet was careful to temper the market expectations by stating gross margin goal is to remain above 70%. “So with that wider range of margins, we still expect our longer-term gross margin targets of 70% to be the direction we're heading, not this year, but over time. So I would still encourage people to think about the margins as we grow the company to trend towards 70%.”
EPS
Astera delivered an impressive 350% beat to GAAP EPS estimates in Q1, driven by its operating margin expansion, while forecasting EPS above estimates for Q2.
- Adjusted EPS of $0.33 beat estimates by $0.05, representing YoY growth of 230%.
- GAAP EPS of $0.18 beat estimates by $0.14, improving from $0.14 in Q4 and marking its second straight quarter of GAAP profitability on the bottom line.
For Q3, Astera guided for adjusted EPS between $0.32 and $0.33, approximately flat QoQ but up 150% YoY at midpoint. GAAP EPS was guided at $0.10 to $0.11, what would be a third consecutive quarter of GAAP profitability albeit down (42%) QoQ.
For the full-year, analysts currently expect Astera to report 50% YoY growth to $1.26 in adjusted EPS, with FY26 EPS growing 36% to $1.72. Heading into Q1’s report, GAAP EPS was expected to be $0.29 for the full-year, but considering Astera is guiding to deliver that figure in 1H, estimates are likely to move substantially higher.
Cash Flows and Balance Sheet
Cash flow margins expanded slightly YoY, though inventories rose and accounts receivable doubled sequentially.
- Operating cash flow was $10.5 million for a 6.6% margin, expanding slightly from a 5.6% margin in the year ago quarter.
- Free cash flow was $6.0 million, for a 3.7% margin, improving from a 0.3% margin in the year ago quarter.
- Cash and equivalents increased $11.1 million QoQ to $925.4 million, while debt remained zero.
- Inventories rose 18.2% QoQ to $51.1 million, likely driven by the ramp of Astera’s Aries 6 and Scorpio P-series products.
- Accounts receivable surged 100.5% QoQ to $69.8 million, driven by Astera’s largest customers. Astera’s receivable balance from its top customer in the quarter rose 363% QoQ to $20.9 million, while its balances from its second and third largest customers rose 75% and 90% QoQ to $14.7 million each. Days sales outstanding also increased from 20-ish days in the past to 40 days this quarter. This is likely foreshadowing Astera is preparing for larger shipments in the next 1-2 quarters.
Customer Concentration and China Revenue
Astera is diversifying its customer base beyond its two largest customers, though it remains quite concentrated with its top four customers accounting for 80% of its Q1 revenue and its top two customers accounting for 49% of revenue. Although Astera does not disclose the exact customers, at one point, their largest customerwas AWS.
SEC filings show that China revenue has been growing as a percentage of revenue from under 15% in Q3, then surged to 35% in Q4, and remaining elevated at 28% in Q1. FY24 exposure was 18.3%, up from <5% in FY23
However, on the call, management stated it was less than 10% of revenue. Perhaps the difference being end market customer is less than 10% yet manufacturing in China represents a larger portion. Addressing this difference in the SEC filing on the call would have been ideal.
Thomas O'Malley Barclays Bank
First one is for you, Mike. You mentioned that there was a China impact on your sales. It's never been a significant portion of your model. But could you give us a feeling just how large that impact was and what that impact will be over the next couple of quarters?
Michael Tate CFO
Yes. So we ship into China with our retimers predominantly right now and they were attached to third-party merchant GPU systems, both were restricted hard stop during the quarter. So there was a modest impact that we have to overcome.
China revenues, when you look at end customer demand, is less than 10% of our revenues. So it's been manageable enough and given the strength of our business and other product lines to continue to grow through this challenge.
Earnings Call Q&A:
Higher Dollar Content from Scorpio-X and Aries PCIe6 Retimers
As growth investors, we are always looking for a catalyst that can sustain growth, or ideally, accelerate growth. For semiconductors and hardware components, there is no better catalyst than incoming higher dollar content for hardware companies.
Therefore, Astera Labs used these words many times on their call. Diving into the details of this, it’s primarily two products where they are forecasting higher dollar content and average sales prices (ASPs):
Aries PCIe6 retimers:
The transition from PCIe5 to PCIe6 will result in higher unit growth and higher ASPs including a gearbox that improves signal quality. PCIe 6 doubles the bandwidth from the 5th generation, with up to 256 GB/s of bandwidth per lane, which will require faster supporting components, such as the retimers that Astera Labs offers.
Here is what was stated on the call: “In fact, we have already started shipping preproduction volume for supporting some of the opportunities. And this would, again, not create an additional TAM to our Aries business because it's adding to the retimer TAM, but essentially bringing in a higher level of ASP simply because you're able to not only do retiming, but also do some of the speed matching that I noted.”
Scorpio X-Series:
The Scorpio P-Series is shipping this quarter and are qualified for Nvidia systems, yet the X-Series will ship in H2 with a bigger opportunity for custom silicon clusters. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count.
The X-Series is for back-end networking in GPU-to-GPU configurations (and custom silicon configurations), and will offer a higher port count. Astera is essentially building something similar to Nvidia’s NVSwitch with the X-Series, but for PCIe-enabled GPUs and ASICs. Per the last earnings call: “And this one, like Mike noted, it's a greenfield use case, meaning if you keep Nvidia and NV Switch aside, everyone else is starting to build configurations that are obviously going to need some kind of a switching functionality, which is what we are addressing with our X Series device.”
The X-Series improves efficiency for ever-increasing AI cluster sizes. The majority of AI clusters are in the tens of thousands GPUs, but are expected to go to the hundreds of thousands (already has with X and some other Big Tech companies), and will see AI clusters with millions of GPUs over the next couple of years.
In an effort to identify a catalyst that can sustain Astera’s exceptional growth, it would be this product that does so. The X-series is used to interconnect GPUs for higher GPU utilization, resulting in higher ASPs. Per the call: “So to that standpoint, X-Series does bring in a lot more value, and therefore, you can assume that the ASPs tend to be significantly higher. And that's — again, there are different — the X-Series is not one device, to be very clear, there are multiple part numbers. So there would be situations where maybe one part number is not at the same level as P-Series. But in general, you can just look at it from a per lane standpoint or per port standpoint, and look at the value delivered. And on that basis, the X-Series will always be a much more valuable, much more higher ASP product than a P-Series.
Notably, Astera maintains their largest opportunity for the X-Series is on the custom silicon side although they foresee hyperscalers wanting to customize their racks in a way that prevents vendor lock-in from both Nvidia and Broadcom.
“So these are fabric switches that are used to interconnect multiple accelerators together. So to that standpoint, a, it's not only a significant dollar opportunity because the ASP of this product tends to be high. But these are also products that are turning out to be anchor sockets for us. If you think of an AI rack being built, you have the accelerators and then you have the fabric that interconnects the accelerators.
So what we are transitioning and what we're excited about is that the Scorpio X device is now translating to be an anchor socket. Think of it as like a mothership around which we are able to now add a lot more products that go along with it, whether it's the silicon level products or module or other form factors that we're considering.
So overall, I want to say that from an opportunity space standpoint, for Astera, the custom ASIC-based implementation tends to offer a lot more opportunities.”
We’ve covered Astera’s products more in-depth in previous analysis here and here.here and here.
Scale-Up will Drive More Revenue
As we’ve discussed in great detail in previous analysis on Blackwell, scale-up architectures combine many GPUs or custom chips into one system with dozens of AI accelerators and soon hundreds of AI accelerators communicating in one cluster.
In line with Scorpio-X being a strong catalyst for the company, management double-downed on why scale-up is a massive opportunity for their products specifically, stating it will result in “hundreds of dollars per accelerator and serve as an anchor socket for integrating additional Astera Labs solutions.” They also stated “increasing accelerator cluster sizes, faster interconnect requirements and overall system complexity challenges are creating substantial dollar content opportunities.”
Given they provided an idea as to the dollar amount per accelerator, there was a question on the call relating to this. Again, I’m pulling out this exchange because a hypergrowth stock like Astera certainly needs additional forward-looking growth opportunities to justify it being in our portfolio – of which I believe scale-up opportunities satisfies this requirement.
Blayne Curtis Jefferies
I wanted to talk about scale up. You mentioned it several times. I think you even said a couple of hundred dollars per accelerator. Today, I think you're selling some retimers and then some PCIe cabling. Can you walk us through the progression of scale up in your participation and kind of can you maybe set some timing? Because I know UAL is probably later next year. So what's the scale-up opportunity for you in between now and then?
Jitendra Mohan Co-Founder, CEO & Executive Director
Blayne, this is Jitendra. Scale up presents a very good opportunity for us. As you know, so far, our revenues have been driven primarily by scale-out opportunities. But for the first half, as Sanjay laid out, we have a significant contribution from scale-up.
And the reason that's so important for us is scale up is really a very rich opportunity of high-speed interconnects that need to deliver low latency and high throughput. And that's where we play today with our Aries retimer products and starting shipments of Scorpio X family.
And we do expect this opportunity to continue to grow as cluster sizes grow and the data rates increase. So we have significant opportunities that we are working on for PCI Express based scale-up networks based on our current Scorpio X family.
But then it also dovetails very nicely into UAL, and we expect this to be a multibillion-dollar opportunity as we provide a full holistic portfolio of devices to address UAL infrastructure.
And as far as the UAL itself is concerned, the spec is not final. It's been released as the 1.0 spec. And so you can imagine that the products will start to be worked on now and start to see first samples in 2026 with the revenue contribution the following year. So that is a very big opportunity that we are very well positioned to take advantage of.
Commentary on Blackwell Delay
I’m certainly liking Astera’s commentary a lot better this quarter than last quarter in terms of us-Nvidia bulls being closer to the bigger Blackwell moment – although I will say it’s unclear right now if Nvidia will go more directly to Blackwell Ultra and skip the more problematic Blackwell NVL system SKUs (I will cover the scenarios as to how we get to H2 pre-earnings). To provide a preview, I have zero expectations that Nvidia’s Q1 will be a good report, instead, we are looking toward the August call and the October call as the stronger moments for AI this year.
Regardless, Astera is one to watch in terms of getting commentary on when we can expect Nvidia’s next catalyst – and we are getting a yellow light improved from a red light last quarter. I believe next quarter will be the green light: all systems go. But this requires patience as this puts us into late summer/early Fall but should be fully resolved by the Q4 time frame.
As noted in the past, the PCIe6 retimers are especially indicative of when Nvidia’s Blackwell systems are shipping. Per our previous analysis “PCIe 6.0 was expected to ramp with support initially offered in the GB200s. Back in March, Astera demo’ed PCIe 6.0 for a wide range of Blackwell products.
There was also indication back in the August call that Gen 6 was confirmed to be used in Blackwell’s GB200, and there were initial shipments: “We have started shipping initial quantities of preproduction orders of our PCIe Gen 6 solution, Aries 6. We ship and support our hyperscaler customers initial program developments that are based on Nvidia's Blackwell platform, including GB200.”
The Scorpio P-Series is also integrated into Nvidia’s Blackwell MGX systems per a recent announcement. Perhaps the strongest comment on the call regarding Nvidia timing was this: “Looking ahead to Q2, we anticipate accelerated shipments of Scorpio P-Series switches and Aries 6 retimers on customized rack scale AI platform based on market-leading GPUs. Additionally, we continue to identify further opportunities for Scorpio P-Series outside of rack scale systems with multiple engagements on modular topologies that support enhanced customization.”
In the opening remarks, it was also stated: “I'm excited to share that we will begin shipping preproduction volumes for Scorpio X-Series starting late this quarter” and later it was expanded on:
Sanjay Gajendra Co-Founder, President, COO & Director
“And then on the — Yes. On the customer on the business side, just to touch on that question that you asked. The great thing about our overall revenue profile is that there are multiple ways in which we are approaching the market, the diversity across both custom ASIC-based platforms versus merchant GPU-based platforms, scale up versus scale out and the multiple product lines that we have enables us to approach the market in many different ways.
And to that standpoint, for us, for first half, what we are expecting is that our revenue would be driven largely by the PCIe scale-up and the Ethernet scale-out opportunities along with the initial shipment of Scorpio P-Series and Aries 6 going into the customized rack.
And second half, of course, lays nicely on top with some of the production ramps that we're expecting with the customized racks, which again, for us, is the Scorpio switches, along with the PCIe 6 retimers.
These are now qualified. So we are starting to see that shipments start becoming significant. So that's part of the second half, and second half, of course, we have CXL initial shipments that we're expecting for production volumes and the Scorpio X switches for the scale up going into the custom ASICs.
Those are also expected to start hitting production — initial production volumes in the second half of this year, which essentially gives us multiple ways, if you will, and sets us up nicely for future revenue growth even beyond '25.”
Conclusion:
The market reaction on Astera may be muted, but I’m liking this report much better than last quarter. The commentary around H2 is becoming clearer and in terms of a holding period, 6-9 months is a brief period of time to wait if the stars are aligning across the suppliers.
I do not have high expectations (at all) for Nvidia’s Q1 but Astera is one piece of the puzzle pointing toward our AI portfolio leading again come August, and then October, and perhaps it’s a big enough splash that the streak continues into January and beyond as well. We will take this one quarter at a time, but I’m hearing what I want to hear, and that’s a sigh of relief. Keep in mind, the I/O Fund strives to be early so do not expect the market to agree with me immediately.
Of course, the path to Q2 earnings calls in July/August and then Q3 calls in Oct/Nov will be incredibly tricky as semiconductors are in the hot seat for global tensions. I’d expect near-term volatility in AI hardware stocks that eventually resolves in our favor. While many are likely nervous about how semiconductors fare, I’m excited as we are quite clear on what to buy and I will be happy to get these stocks on discount if the market is foolish enough to give it to us.
p.s. excuse the typos as our team is in a fast sprint covering many earnings reports this week
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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