This quarter, Super Micro reported revenue of $3.85 billion, reflecting a staggering growth rate of 200.7% YoY. This technically missed estimates by 1.3%. Management increased guidance to between $5.1 billion to $5.5 billion, up from $4.9 billion, indicating year-over-year growth of 142.6% at the midpoint.
The company's GAAP EPS of $6.56, surpassed analyst expectations of $5.16. Next quarter, the expected GAAP EPS ranges from $7.20 to $8.05 compared to analyst expectations of $6.87 EPS.
What lies beneath this phenomenal growth rate is the need to raise cash to fund operations, which for Super Micro means buying excess inventory to prepare for future growth, especially as it relates to liquid cooling. Inventory of $4.1 billion amounts to 85% of revenue, whereas SMCI held closer to 70% of revenue in the past.
This quarter, the operating cash flow margin was (-39.5%) and the free cash flow margin was (-42%). This is a material change to the story given the current macro environment, and management did not indicate it will get better in the near-term as it’s related to components for liquid cooling systems. Per management: “We continue to face some supply chain challenges due to newer products that require new key components, especially, specifically, DLC related components, and believe this situation will gradually improve in the coming quarters.”
Revenue and EPS
For the third quarter of fiscal year 2024, Super Micro reported revenue of $3.85 billion, up $2.57 billion, or 200.7%, compared to $1.28 billion for the same quarter in the previous year. This growth was slightly under the projected midpoint based on management’s previous guidance of revenue in the range of $3.7 billion to $4.1 billion.
For Q4 FY24, management is guiding for revenue in the range of $5.1 billion to $5.5 billion, representing YoY growth of 142.6% at the midpoint. This compares to analyst estimates for $4.9 billion and growth of 124% going into the print.
There is a drop off in Q2 FY25, which is calendar year Dec 2024, and hopefully revisions flow through to increase this growth rate. It may seem far off, but this is a high beta stock that sees volatile price action based on signs of weakness or strength.
Management raised full year revenue growth to 109.3% for revenue of $14.9 billion. This is up from guidance for revenue of $14.5 billion last quarter.
SMCI also established full year GAAP EPS and non-GAAP EPS guidance for FY24. GAAP EPS is guided to $21.61 to $22.46, compared to GAAP EPS of $11.43 for FY23. This would mark a 92.9% increase YoY at the midpoint of guidance. Management expects non-GAAP EPS to be in the range of $23.29 and $24.09 for FY24. This would be YoY growth of 100.6% at the midpoint compared to FY23 non-GAAP EPS of $11.81.
GAAP EPS for March was $6.56 compared to analysts’ consensus of $5.16. This is 28.6% higher sequentially with $5.1 GAAP EPS in the previous quarter and is 328.8% growth from the year-ago quarter. Adjusted EPS was $6.65 for similar YoY and QoQ growth.
Looking forward, next quarter’s GAAP EPS is expected to be between $7.20 and $8.05 for over 122.3% growth from the year-ago quarter. Adjusted EPS of $8.02 at the midpoint will see similar YoY growth. This compares to analyst estimates of $7.16.
Margins
- Gross margin was 15.5% in Q3 for gross profit of $597.4 million. The company is guiding to a lower gross margin next quarter. An analyst on the call implied it would be 13.5% to 14% next quarter.
- Operating margin was 9.8% for operating profit of $378.3 million and adjusted OPM was 11.3%.
- Net margin was 10.5% for net profits of $402.5 million. Adjusted net margin was 10.7%.
Adjusted gross margin was 15.6% for Q3, improved slightly QoQ from 15.5%, however, adjusted gross margin was down 210 bps YoY compared to 17.7% in the same quarter a year ago. On the adjusted gross margin declines, management stated it is due to product/customer mix and focus on market share gains.
Note: Margins on SMCI tend to be thinner than most semiconductors, which is a key topic of analysts’ focus during each earnings call. The CFO has stated the target margin is between 14% and 17%.
Cash Flow and Balance Sheet
Cash flow used in operations for Q3 was $1.5 billion compared to cash flow usage of $595 million during the previous quarter as the company grew inventory and accounts receivable for higher levels of business.
Cash flows from strong profitability was offset by higher Inventory, a large portion of which was received late in Q3, and higher Accounts Receivable from increasing revenues. The Q3 closing inventory was $4.1 billion, which increased by 67% QoQ from $2.5 billion in Q2 due to the purchase of key components. Capex was $93 million for Q3 resulting in negative free cash flow of $1.6 billion for the quarter.
On its balance sheet, the company reported $2.12 billion in cash and cash equivalents and $1.86 billion in debt, up from $726 million in cash and debt of $376 million in the previous quarter. Consequently, the net cash position stood at $260 million, declining from $350 million in the last quarter.
During the quarter, SMCI announced a $1.5 billion principal amount of convertible senior notes that will be due in 2029. The company also announced a public offering of common stock as SMCI raises capital 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 Q3 revenue.
- Subsystems and Accessories were $152 million, up 27% YoY and was 4% of Q3 revenue.
Vertical Markets
- OEM Appliance & Large DC: 50% of total revenues, down from 59% last quarter and up from 47% a year ago.
- Organic (Enterprise & Channel), AI/ML: 49% of revenues, increasing from 40% of revenues last quarter, and slightly down from 50% of revenues a year ago.
- 5G, Telco & Edge/IoT: 1% of revenues, flat compared to last quarter and down from 3% of total revenues a year ago.
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 last quarter’s customer concentration of 26% and 11%, respectively.
Inventory:
Inventory days increased to 92 days compared to 67 days in the previous quarter. The company’s Q3 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.
This was asked about on the call and we detail it for you below. It’s also reflected in the steep, negative operating cash flow reported this quarter.
Geography:
All revenues were up by a wide margin QoQ.
- United States was 70% of revenue, and increased 242% YoY and 3% QoQ.
- Asia was 20% of revenue, and increased 257% YoY and 17% QoQ.
- Europe was 7%, and increased 30% YoY and 3% QoQ
- ROW was 3%, and was up 87% YoY and was down 11% QoQ
- China accounted for 1% of total revenue.
Earnings Call:
Inventory increase:
The inventory days increasing doesn’t entirely explain the steep $4.1 billion in inventory. Rather, the company has to hold more inventory while waiting for key components related to liquid cooling. This is out of character for Super Micro to hold this much inventory and this will not be comfortable for the Street to accept given the company has diluted shareholders and raised debt in the past quarter.
Question
Aaron Rakers (Analysts)
Yes. I'll try and slip in 2 here, if I can. So I guess one of the just kind of housekeeping questions is a very significant increase in inventory this quarter. I know you said that it came in towards the end of the quarter. How do we think about the trajectory of inventory as the supply comes on? Do you expect inventory to stay at this level? Do you expect it to start to come down? I'm just kind of curious how we think that flow through kind of looks as you take on more supply […]
Answer
Charles Liang (Executives)
Two reasons we had to increase inventory: One is because Q4, I mean, June quarter, we will have a strong revenue growth; a second reason because we're preparing for high-volume liquid cooling. Again, we have more than 1,000 of 100k watt, I mean, liquid cooling rack we have to ship to customers in Q4. And liquid cooling as you know, is pretty new. So we had to prepare enough inventory so that we can deliver liquid cooling rack scale product to customer on time or with minimal lead time. So both factor, indeed, is a positive factor. And with our economic scale continuing to grow, indeed, our inventory average [ daily ], indeed, will slightly improve.
Answer
David Weigand (Executives)
Yes. So Aaron, my take on that is I hope that our inventory continues to grow because that means there's a reason behind it, so — and it's tied to sales.
–End quote
Here was another discussion around the inventory levels:
Question
Nehal Chokshi (Analysts)
Congrats on a strong guide here. Talk about the guide here. Inventory increased $1.5 billion Q-over-Q. And Dave, as you mentioned, you'd like to see inventory increase. I do too because it's a strong indicator of things to come. And you guided June quarter to increase by $1.6 billion Q-over-Q. If I do this math, where I'm looking at the inventory at the quarter end and then the [ fourth ] quarter revenue, typically, it's around 60% to 70% of revenue. But with your March Q ending inventory and your current [ June, too, ] guidance, that equates to about 85% of projected revenue. So can you just explain what seems to be a little bit more usual inventory buildup given the revenue guidance range?
Answer
David Weigand (Executives)
Sure. Absolutely. That's a fair question. So we actually got a substantial amount of inventory in the last week of the quarter, okay, which obviously, we're not going to be able to ship, but we took in $700 million in the last week of the quarter. So that's not something — that's something that has to do with when inventory arrives. And so we — it hurts our cash flow, but you know what, it doesn't matter, because we need that inventory for Q4 shipments.
Answer
Charles Liang (Executives)
Yes. Again, 2 reasons, right? Q4, we will have a strong revenue, so we had to prepare for Q4. And also, I mean, liquid cooling, I mean, it's new. So we had to prepare enough safety inventory for liquid cooling demand for June quarter and September quarter as well. So that's another reason why we have a slightly higher inventory now.
Answer
David Weigand (Executives)
Yes. And I want to add, Nehal, that, that's exactly why we did capital raises, too, is to prepare for these Q4 shipments, and — so that we could make those large purchases, and we hope to continue that.
–End Quote
Sequential Growth is the New Normal
My ears perked up on this comment, when the CEO was asked if they are capable of future sequential growth:
Answer
Charles Liang (Executives)
Yes. As you know, traditionally, in the last 10 years, right, I mean, the September quarter and March quarter, always our soft quarter. But now with AI, we've been growing so strong. So we basically are able to grow sequentially. So although March and September be a little weak, but basically, because of strong AI growth and our market share growing, so the sequential growth will become the normal. And basically, I mean, we have even better technologies than before ever, and now economic scale become much bigger. Malaysia campus production will be ready by end of this calendar year, so we see a lot of positive factors to grow our business.
–End Quote
SMCI Likely to Raise more Capital
This is likely the comment that caused the stock to go down 10% AH despite the strong beat and raise. An analyst asked the CFO if he foresaw a need to raise more capital. Here was his reply:
Answer
David Weigand (Executives)
Yes. So the way I would answer that is, is that I hope that I have — I need more capital, Jon, because that means that we're booking — that we're growing revenues even faster. So we've got capital adequate to get us through the current market, which means today. But in a week, that — we hope that, that changes, and we hope that we've got orders that require even more capital. So all I can say is I hope that — I'm hoping for the need for more capital.
Answer
Charles Liang (Executives)
Yes. We believe our revenue will continue to grow strong. And that's why we need more capital to grow faster. If we grow 20%, 30%, we may have enough capital now, but it will grow much faster. Then for sure, we need more capital to grow stronger.
–End Quote
My comment: this is not what the market wants to hear right now, which is that you have to raise capital to fund growth. Supermicro is an incredible company situated perfectly between hyperscalers and the world’s best design companies. However, this is not the right macro environment to need to raise capital. Not even an AI bullet train can change those facts.
Conclusion:
There is no doubt, we rode a phenomenal wave with Supermicro over the past few months. The comment that sequential growth will be the new norm is music to our ears, as growth investors. However, we can’t fight the Fed. This is a good time to put the surf board down for a little while and let the next wave gather strength before we attempt Supermicro again.
In our pre-earnings writeup, I had stated: “it’ll be negative cash flow margins and/or dilution that penalizes the stock,” as well as: “The stock seems to be on a never-ending winning streak, however, what could be Super Micro’s Achilles heel is the cash issue — as the company must grow capacity to keep up with the revenue growth, yet to do so will require cash.”
If it were just about inventory, to where the shipments came in late in the quarter but was spoken for the following quarter, then that would not be an issue. From this report, the concern is the large appetite the company has to raise more cash to support growth. The tie-up on inventory for the direct liquid cooling components is an additional concern but it’s the primary issue around having to raise more cash that ultimately doesn’t meet our criteria at this time.
As you are aware, Super Micro is a high beta stock and we plan to adhere to our line in the sand. The good news is that we’ve made sizable profits and plan to put those to work at lower levels.
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