Supermicro has produced a neck-breaking 1-month return of 84% in four weeks, if we assume it opens at $547 tomorrow. This is exceptional as QQQs are only up 4%. As a reminder, it’s been one of the best performing stocks for two years in a row. Supermicro personifies the saying “winners keep winning.”
Last quarter, we had stated that Super Micro’s guidance appeared to be conservative: “By far, the most important question on the call was if management was being conservative in their fiscal year guide OR are there challenges ahead for the March and June quarter? Management provided a straightforward answer that Q4 and the fiscal year guides are conservative, implying that we have chance for a beat again in the near-term.”
The CEO further repeated the word “conservative” a few times last quarter. We like this as it creates trust with the management team, especially as SMCI was being doubted in a bout of weakness for the stock during the last report, being down (-12.7%) that month. We were able to rely on management’s comments irrespective of what the market was doing, and this is our preferred path.
The word “conservative” was used again, and an analyst attempted to model how SMCI could exit the year. If the analyst is correct in modeling the opportunity, then there’s roughly 60% room in the stock’s valuation. Each investor will need to decide for themselves how to interpret the Q&A. However, that was my takeaway and it’s likely we take a shot at adding to our position tomorrow.
Before I get too caught up in describing the revenue beat, I do want to say that cash was a blemish for this report and it’s important to file a note that cash flow needs to be watched. We detail this below under the Cash section.
Revenue and EPS:
Similar to Nvidia’s streak last year, analysts cannot keep up with Super Micro this month. As soon as the analyst consensus is revised, Super Micro delivers again.
Here is what that has looked like:
- Originally, the current Q2 quarter consensus was $2.49B at the midpoint with analysts revising it to $3.26B. Super Micro beat this with actual revenue of $3.7B for growth of 103% YoY and 73% QoQ.
- For the forward Q3 quarter, consensus was $2.99B and Super Micro has now guided for revenue of $3.7B to $4.1B, representing YoY growth of 204% at the midpoint.
- Fiscal year estimates were revised upward to $11.5B on January 22nd, yet Super Micro guided for $14.3 billion to $14.7 billion, at the midpoint. This represents growth of 103.6% for the fiscal year. In the opening remarks, the CEO referred to “continued strength in the second half of 2024.”
GAAP EPS for December was $5.10 compared to the analysts’ consensus estimates of $4.90. This is nearly 80% higher sequentially with $2.85 GAAP EPS in the previous quarter and is 62% growth from the year ago quarter. Adjusted EPS was $5.59 for similar YoY and QoQ growth.
Looking forward, next quarter’s GAAP EPS is expected to be between $4.79 and $5.64 for over 240% growth from the year ago quarter. Adjusted EPS of $5.60 at the midpoint will see similar YoY growth.
Margins:
The margins on SMCI are thinner than most semiconductors, and this leads to questions on the earnings call. We detailed you this quarter’s questions about the margins for you below.
- Gross margin was 15.4% for gross profit of $564.4 million
- Operating margin was 10.1% for operating profit of $371.5 million and adjusted OPM was 11.3%
- Net margin was 8% for net profits of $295 million. Adjusted net margin was 9%.
Cash:
Operating cash flow was (-$595) million for a negative margin of (-16.2%). This compares to +12.8% last quarter and +9% in the year ago quarter. Per the CFO: “Cash flow used in operations for Q2 was $595 million compared to cash flow generated by operations of $271 million during the previous quarter. Strong profitability and higher level of accounts payable was offset by higher inventory and accounts receivable due to build plans for Q3 and the timing of shipments during Q2.”
Free cash flow was (-$610) million for a margin of (-16.6%) compared to +12.7% last quarter and +8.4% in the year ago quarter.
The company has $726 million in cash on its balance sheet and $376 million in debt. This is up from $543 million in cash last quarter and net debt of $146 million. This results in net cash position of $350 million compared to a net cash position of $397 million last quarter.
The company was able to increase its cash through an equity offering: “During the quarter, we executed an equity offering and raised approximately $583 million in net proceeds after underwriting discounts and other issuance costs from the sale of 2.3 million shares at a price of $262 per share. The proceeds will be used to strengthen our working capital, enable continued investments in R&D and expand global capacity to fulfill strong demand for our leading platforms.”
Key Metrics:
Revenue Segments:
- OEM Appliance and Large Data Center segment was $2.15 billion for 59% of revenue. This was up 175% YoY and 83% QoQ. Per management: “Two existing CSP/large data center customers represented 26% and 11% of total revenues for Q2"
- Organic (Enterprise & Channel), AI/ML was $1.48 billion for 40% of revenue, up 55% YoY and up 62% QoQ. This was driven by “enterprise AI and CPU upgrade programs.”
- 5G, Telco and Edge/IoT was 1% of revenue for $35 million.
Revenue Mix:
- Server and storage systems were $3.4 billion in revenue for growth of 107% YoY and was 94% of Q2 revenue
- Subsystems and Accessories were $229 million, up 61% YoY and was 6% of Q2 revenue.
Inventory:
Inventory days decreased to 67 days compared to 91 days in the previous quarter. This is aligned with management’s comments on tight supply.
Geography:
All revenues were up by a wide margin QoQ.
- United States was 71% of revenue, slightly down from 76% last quarter. Revenues increased 139% YoY.
- Asia was 18% of revenue, up from 11% last quarter. Revenues increased 98% YoY.
- Europe was 8%, down marginally from 9% last quarter. Revenues decreased 8% YoY.
- ROW was 3% compared to 4% last quarter. Revenues increased 67% YoY.
Earnings Call Q&A
“Conservative” Referenced Again
My ears perked up when I heard the following from question:
Samik Chatterjee
Got it. And then just this more near-term question when I look at the revenue guide for 3Q and 4Q. Is a step-up here in revenue of about sort of call it $0.5 billion a bit less going from 2Q to 3Q. And then a bigger step-up to get to the mid-point to be annual guide into 4Q, how much of that is driven by just being a bit more cautious about when supply comes in and pushing that the revenue guide a bit more to the 4Q or is that really what the visibility currently of supply of just trying to get sort of what's driving the cadence from 2Q to 3Q to 4Q. And the guide that you provided. Thank you.
David Weigand
Yeah, so Samik, we have a very large and growing backlog, which grew again this quarter. And so really as Charles mentioned earlier, our only constraint is supply. However, the good news is, supply is improving. And so to your point, we have to be somewhat conservative, because we are constrained still by supply.
Regarding how far and how quick the company can grow, it doesn’t hurt that Super Micro is preparing supply to break the $25 billion revenue mark:
“Today, our production utilization rate is about 65% across our USA, Netherlands and Taiwan facilities, and they are quickly filling. To address this immediate capacity challenge, we are adding two new production facilities and warehouses near our Silicon Valley headquarter, which will be operating in a few months. The new Malaysia facility will focus on expanding our building blocks with lower costs and increased volume, while other new facility will support our annual revenue capacity above $25 billion.”
Later in the call, an analyst modeled SMCI ending the year with a $5.6 billion quarter. The CEO seemed to agree. I’m quoting it here in full so each investor can form their own takeaway.
“Ananda Baruah
Yeah, good afternoon guys. And thanks for taking the question. Appreciate it. Congrats on the really solid execution. Yeah, congrats on that. I guess, two if I could, Charles. And maybe a clarification, I did some math on the 15,000 racks per month. And they came up with — I guess $5.6 billion a quarter, let's call it 5.5%. I guess, plus or minus but that came to $5.6 billion, is that kind of accurate and I guess the question is — if it stood at midyear, you're talking about getting to that point. Is that the kind of run-rate opportunity that we can be thinking about quarterly and not like a guidance, but like an opportunity when you get into sort of the back half of the calendar year. Just wanted to make sure that we're interpreting that kind of accurately and then I have a quick follow-up. Thanks.
Charles Liang
Yeah, again, we see, we recommend green computing everywhere. That's why wherever, whenever we can help a customer at base, we will. That's why we have been building really large-scale capacity for liquid cooling and other green computing solutions. So yes, that capacity will be huge, but its capacity there, when customer need, we are ready. And indeed our facility also very flexible. Lots of facility can support liquid cooling and air cooler, or combination cooling. So yes, we have a huge capacity ready for growth, but not necessarily all for liquid cooling, they support air cooler or combination hybrid cooling as well.”
This is based on comments from the CEO that: “By this June quarter, we will have high volume, dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid-cooling capabilities, providing DLC, direct liquid cooling racks capacity up to 1,500 racks per month and our total rack production capacity will be up to 5,000 racks per month by then.” This means SMCI will exit the calendar year capable of 14,000 racks.
Questions on the Margins
Notably, Super Micro has weaker margins than was Wall Street prefers. There is always a question about margins on the call. There was a large revenue beat that did not flow through to a higher gross margin or operating margin, and in this Q&A session, the CFO stated: “And so, at this time we are we are growing really quickly. And in order to do that and in order to take market share, we will take opportunities by being more competitive on pricing.” The CEO followed up with: “The good thing is that when we continue to grow our economies of scale, our operation margin indeed will be still able to keep in healthy position.”
Here was a more specific question:
Jon Tanwanteng
Got it, and to ask one of the questions that's been mentioned in a different way, is there a gross margin floor as you pursue this share gain. And when do you see a possible inflection? I'm just wondering what is the limit. When you go in terms of gaining share versus the margin that you generate?
David Weigand
Sure, so we set out a target back in March of 2021 of 14% to 17%. But that's and we've actually done pretty well against that target.
The Mystery 11% Customer
With Intel clearly stumbling (again!), I think the 11% Mystery Customer could be AMD. This is pure speculation, and one we don’t have to wait too long to find out given AMD reports tomorrow night.
Aaron Rakers
Yeah, thanks for taking the questions and also great results. Just curious, when you talk about your customer concentration and the diversity of the business, when you talk about 26% and 11% of your revenue coming from two customers, are those the same customers, like last quarter I think you had a customer that was 25%, or are you seeing these customers kind of bounce around. I guess the simple question is just, is that the same customer 26% and 25%?
David Weigand
So, Aaron. The 26% customer is the same customer. But the 11% customer is not a new customer, and it's a longer-term customer. But first time in 11% and to your point, yes, we do see a bouncing in and out, and we're very happy. Anytime they do bounce about by the way.
Liquid Cooling Reaches Inflection with Nvidia’s B100s
Super Micro is primarily air cooled right now, yet liquid cooling is growing. Per the CEO in the opening remarks: “By this June quarter, we will have high volume, dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid-cooling capabilities, providing DLC, direct liquid cooling racks capacity up to 1,500 racks per month and our total rack production capacity will be up to 5,000 racks per month by then.” To read more on liquid cooling, reference our previous Super Micro analysis here.Super Micro analysis here.
Here was another comment from the CEO regarding liquid cooling reaching an inflection point with Nvidia’s upcoming release of the B100s:
Quinn Bolton
Okay, got it and then as Charles said, question on liquid cooling. Just as you look forward, you guys are ready, it sounds like the infrastructure may still need some improvements, but I guess as you look at data center customers CSPs that are looking to deploy liquid cooling. Is that sort of does that include current-generation sort of 700-watt, GPUs are, is it really the next generation, the B100s and sort of the 1,000 watt GPU class that really drives the adoption at your CSP customers, drives that need for liquid cooling.
Charles Liang
You are right. In these current 600 watt, 700, watt module, people can still take care very well, we say air conditioning. And that's why people still are comfortable with our traditional air cooler. But when that system grows to 1,000 or even 1,000 watt per module, yes. I mean — I think cooling becomes even much more critical. So, by that time, I believe. Most of the data center will have facility ready for that. So we are very optimistic and very patient to continue to improve our quality, especially that reliability and easy for maintenance. So when customers are ready, we can dwell quickly to support them.
Conclusion:
If the analyst’s model of the opportunity is correct, then Supermicro’s valuation just became quite attractive. The market cap is 27.5 billion at market close, and the run rate would be $22.4 billion in this case, leading to a 1.2 P/S on a company that was trading at a 1.9 P/S, as of market close if we use the previous December quarter estimate of $3.68 billion. This could translate to 60% room in the valuation. For our risk profile purposes, we think it’s worth a shot to add to our position tomorrow and will keep you posted.
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