Super Micro’s report carries enormous weight given the news that Nvidia’s Blackwell will be delayed up to three months. From what we know today, the GB200 systems will be given the CoWoS-L capacity and the B100s and B200s will have to wait until more capacity comes on line from TSMC’s side. Clearly, the market is nervous about this news, and coupled with the economic data from last week, Nvidia and SMCI have seen especially weak price action with NVDA down (-10%) in a week and SMCI down (-13%) in a week.

Blackwell and direct liquid cooling (DLC) are intricately linked, which we’ve covered here. Although SMCI cannot speak for Nvidia, the report today has enough readthrough that it will set the tone for both stocks. What we hopewe hope to hear from management is that the exact date for the B100s and B200s arrival is immaterial given the demand environment. Meaning, there are enough buyers lined up for Nvidia’s Hopper GPUs, along with enough CoWoS-L capacity from TSMC to meet demand for the GB200’s, that combined this can meet or exceed fiscal year estimates. There are also additional variations of Blackwell being designed for the CoWoS-S packaging from TSMC.

Per Semi Analysis: “Combine these two issues and it’s clear that TSMC will not be able to supply enough Blackwell chips as Nvidia would like. Consequently, Nvidia is focusing what capacity they have almost entirely on GB200 NVL 36×2 and NVL72 rack scale systems. HGX form-factors with the B100 and B200 are effectively now being cancelled outside of some initial lower volumes.”Nvidia is focusing what capacity they have almost entirely on GB200 NVL 36×2 and NVL72 rack scale systems. HGX form-factors with the B100 and B200 are effectively now being cancelled outside of some initial lower volumes.”

What we don’t know from the journalists and analysts is how many GB200 systems Nvidia can produce with TSMC’s available CoWoS-L capacity along with the amount of GPUs Nvidia will sell on using CoWoS-S advanced packaging technology. We’ve discussed on social media that the GB200s are oversubscribed. Read more here on Blackwell and its GPU series, including differences between the B100, B200 and GB200s and CoWoS advanced packaging.more here on Blackwell and its GPU series, including differences between the B100, B200 and GB200s and CoWoS advanced packaging.

In terms of importance, Supermicro’s report far outweighs what a journalist publishes or an analyst’s note on this topic — we will update you in the after-hours with granular detail on what is reported after hours and what we think it implies for Nvidia and AI semis.

With that backdrop, Super Micro will release its Q4 FY2024 results on August 06th. Management revenue guide for Q4 is in the range of $5.1 billion to $5.5 billion, representing a YoY growth of 142.6% at the midpoint. The FY 2024 guide was raised to $14.7 billion to $15.1 billion, representing YoY growth of 109.3% at the midpoint, up from the previous range of $14.3 billion to $14.7 billion.

Last quarter, adjusted EPS grew by 308% YoY to $6.65 and beat estimates by 19.4%. Consensus for adjusted EPS is growth of 134.2% YoY to $8.22 in FQ4 and 117.7% YoY to $7.58 in FQ1.

Supermicro started shipping DLC liquid cooling racks in volume to top AI customers in May. For direct liquid cooling (DLC) adoption, management expects to reach 15% in the next 12 months and 30% over the next two years, a rapid shift from the current 1% of the market. Any updates on DLC will be viewed as a readthrough to Blackwell.

Revenue

The analysts expect FQ4 revenue to grow 142.3% YoY to $5.29 billion. Revenue growth is expected to accelerate to 155.3% in FQ1 and then slow to 62% and 54.3% in the next two quarters.

Q3 revenue grew by 200% YoY to $3.85 billion; however, it missed the analyst’s consensus estimates by 1.2%. Management attributed the revenue miss to the shortage of new key components, and they expect the situation to gradually improve in the coming quarters.

Charles Liang, President and CEO of Supermicro, said, “Strong demand for AI rack scale PnP solutions, along with our team’s ability to develop innovative DLC designs, enabled us to expand our market leadership in AI infrastructure. As new solutions ramp, including fully production ready DLC, we expect to continue gaining market share. As such, we are raising our fiscal year 2024 revenue outlook from $14.3 to $14.7 billion to a new range of $14.7 to $15.1 billion.”

Margins

The company has been focusing on market share gains, which has led to gross margins decelerating. Management guided a sequential decline in adjusted gross margin for the next quarter. An analyst on the call implied it would be 13.5% to 14% next quarter. To the question on the long-term adjusted gross margin target of 14% to 17%, the management reiterated that the target is still 14% to 17%, as they are expected to benefit from the economies of scale, particularly when the new Malaysian facility to be in production later in the calendar year.

Gross margin declined by 210 bps YoY and up 10 bps sequentially to 15.5% and adjusted gross margin came at 15.6%.
Operating margin improved by 210 bps YoY and declined by 30 bps sequentially to 9.8%. Adjusted operating margin improved 260 bps YoY and flat sequentially to 11.3%. The improvement in operating margin was due to the benefits of economies of scale and improved operating leverage.

Net income came at $402.46 million or 10.5% of revenue compared to $85.85 million or 6.7% of revenue in the same period last year. Adjusted net income came at $411.54 million or 10.7% of revenue compared to $93.53 million or 7.3% of revenue in the same period last year. GAAP EPS grew by 329% YoY to $6.56 and beat estimates by 27.1%. Adjusted EPS grew by 308% YoY to $6.65 and beat estimates by 19.4%.
Management Q4 GAAP EPS guide is $7.20 to $8.05 and adjusted EPS guide is $7.62 to $8.42. Analysts expect adjusted EPS to grow 134.2% YoY to $8.22 in FQ4 and 117.7% YoY to $7.47 in FQ1.

Cash Flow and Balance Sheet

FQ3 operating cash outflow was (-$1.52 billion) or (-39.5%) of revenue compared to operating cash flow of $198.2 million or 15.5% of revenue in the same period last year and cash outflow of (-$595 million) in the previous quarter. The cash flows from higher profitability were offset by higher inventory and increasing accounts receivable.
FQ3 free cash outflow was (-$1.61 billion) or (-41.9%) of revenue compared to $190.26 million or 14.8% of revenue in the same period last year and free cash outflow of (-$610 million) in the previous quarter. Capex was $93 million. Management guide for the next quarter is $55 million to $65 million.
The company had cash of $2.12 billion and debt of $1.86 billion compared to $726 million and $376 million in the previous quarter. Net cash declined to $252 million compared to $350 million in the previous quarter.
The company raised $1.55 billion during the quarter from a 0% coupon 5-year convertible notes due in 2029. The company also raised $1.73 billion in equity offering to support operations, including purchases of inventory and other working capital needs, manufacturing capacity expansion and increased R&D investments.

Key Metrics

Server and Storage Systems & Subsystems

Server and storage systems were $3.7 billion in revenue for growth of 218% YoY and was 96% of FQ3 revenue.
Subsystems and Accessories were $152 million, up 27% YoY and was 4% of FQ3 revenue.

Vertical Markets

OEM Appliance & Large Data Center revenues grew by 222% YoY and declined by (-10%) sequentially to $1.94 billion. It represented 50% of revenue compared to 59% in the previous quarter.

Enterprise and Channel revenue grew by 190% YoY and 26% sequentially to $1.88 billion. It represented 49% of revenue compared to 40% in the previous quarter.

Emerging 5G/Telco/Edge/IoT revenues were $37 million or 1% of Q3 revenues compared to $35 million in the previous quarter.

According to the CFO, “One existing CSP large data center customer represented 21% of Q3 revenues and one existing enterprise channel customer represented 17% of revenues.” This compares to FQ2 "Two existing CSP/large data center customers represented 26% and 11% of total revenues for Q2."

Other key points to watch

AI GPU

The company’s 200% FQ3 revenue growth was primarily helped by the AI GPU business from enterprise and cloud service provider customers. The AI business contributed over 50% of revenue in the last four quarters. Per the last report, supply chain improvement and new air-cooled and liquid-cooled customer design wins they expect strong growth in the coming quarters. We will hope management confirms the information again this quarter.

According to TrendForce, AI server shipments in Q2 will increase by 20% sequentially as cloud service providers focus on procuring AI servers. They also observe that advanced AI servers are expected to be strong through 2025, particularly as Blackwell is going to replace the Hopper platform.

According to Economic Daily, SMCI is expected to ship more than 10,000 cabinets of AI servers next year equipped with GB200, accounting for 25% of Nvidia’s total GB200 cabinets.

Direct Liquid Cooling

Liquid Cooling is essential in reducing the heat that AI systems generate. We first covered Liquid Cooling in our analysis here and also recently here. Although liquid cooling technology has been around for decades, yet this technology is becoming mission-critical due to the increasing levels of compute power from AI accelerators, starting with the GB200 systems and B200 GPUs.

Although the GB200 will ship at the end of this year and the B200 will fully ship in early 2025, vendors are scaling their liquid cooling capacity now. The capacity investments are being made right now, and we can see evidence of this in Super Micro’s earnings report with an increase in inventory. We also find hints of this in Dell’s earnings report, with the company also reporting an increase in inventory as these leading AI server companies wait for Nvidia’s Blackwell to ship.

Super Micro expects liquid cooling to be rapidly adopted over the next year and a half. The company is deploying three of the “world’s largest DLC liquid-cooled” systems in the current quarter, ending in June. The Nvidia HGX AI supercomputers with liquid cooling are expected to “potentially” save customers up to 40% of energy costs compared to air-cooled systems.

Charles Liang said in the earnings call, “At this moment, we are focusing on delivering more than 1,000 racks of NVIDIA HGX AI supercomputers, each rack supports 64 piece H100, H200 or B200 GPUs, with the latest DLC liquid cooling technology to three industry-leading customers, from April to June of this quarter. These three deployments will be among the world's largest DLC liquid-cooled AI clouds, potentially saving our customers up to 40% of energy costs compared to standard air-cooled deployments by our competition.”

SVP and CFO, David Weigand, explained at BofA’s conference, “So, we have started to ship liquid cooling at really at scale, at larger volumes in this core….. As much as the fact that all the GPUs and CPUs are running at higher wattage as they go over 1000, it's going to start to become painfully obvious.”

SMCI’s management has stated that liquid cooling will cost more as it takes longer to assemble and test, and the company plans to charge for this. It’s also expected that SMCI will be the first to ship liquid cooled AI systems before its competitors.

Capital raises likely

The company expects strong growth in the coming quarters due to robust AI demand and market share gains. Management mentioned that “sequential growth will become normal.” The company raised $3.28 billion in convertible senior notes and equity offering in the FQ3. During the Q&A, management replied to an analyst’s question that they might need to raise more capital in the future due to the strong expected growth. They also mentioned earlier in the call that they want to support growth with minimal equity dilution.

Inventory

The company’s FQ3 closing inventory was $4.1 billion, which increased by 67% quarter-over-quarter from $2.5 billion in Q2 due to the “purchase of key components.” Management attributed the increase in inventory due to the expected strong growth in the June quarter and the liquid cooling opportunity. The rise in inventory also negatively impacted the cash flows particularly as the company received about $700 million in inventory in the last week of the quarter.

Valuation

Supermicro has an old school semiconductor top line valuation that reflects its roots as a server maker. Currently it has a P/S ratio of 3.0 and a forward P/S ratio of 1.5. The P/S ratio peaked in March 2024 and is presently trading above the average P/S ratio of 1.17 as the market is rewarding the stock due to the company’s transition from a traditional server player to an AI server player.

Conclusion

AI GPU demand has no signs of slowing down as Big Tech Capex continues to spend billions on AI Infrastructure. This has led to an exponential increase in power consumption. Data Centers are expected to adopt liquid cooling technologies to reduce the heat and Super Micro benefits from these emerging tech trends. The stock, which was included in the S&P 500 Index earlier this year, was also included in the Nasdaq-100 Index on July 22nd. At the same time, the capital raise and the cash flow issues are to be monitored in the coming quarters.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

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