Supermicro beat this quarter and raised for next quarter. The fiscal year was raised, as well. Overall, the quarter was strong with the only blemish a vague comment that AI revenue was “over 50%.” Management did not give an exact number, and there are reasons to believe that due to a low quarter seasonally, that AI revenue was below the 52% it was last quarter.
There was not an exact confirmation on the number, but I lay reasons below as to why it’s likely it was between 50% to 52% (lower than last quarter). The most obvious one is that revenue decelerated QoQ, and at half of the company’s revenue, it’s likely AI-related revenue tracks total revenue and also decelerated QoQ. Semiconductor companies are lumpy. For example, next quarter SMCI will grow 32.1% QoQ. Therefore, by my estimation, this is not a concern within the scope of a seasonally low quarter, and it should resume growth along with total revenue for the December quarter.
The gross margin and operating margin declined both QoQ and YoY, yet it’s the expectation these will improve over time. Given the strong earnings, this is less of a concern as the company is certainly GAAP profitable. Management indicated that gross margin will improve as AI continues to ramp, and as they expand facilities in Malaysia and Taiwan. Cash came in strong, which is what we wanted to see.
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. I’ve included this part of the transcript below.
Revenue and EPS:
Revenue of $2.12 billion for growth of 14% YoY came in above expectations of $2.06 billion for 11.4% growth.
For the next quarter, the company guided $2.80B at the midpoint, for growth of 55.6% compared to expectations of $2.52B for growth of 40%.
The combined beat and raise were for $340 million in revenue. Meanwhile, management raised guidance for the fiscal year by $500 million. The previous guide was for $10B at the midpoint, and is now at $10.5B at the midpoint.
Adjusted EPS of $3.43 beat expectations of $3.25 and beat management guidance of $3.13 at the midpoint. GAAP EPS of $2.75 also beat management guidance for $2.41, at the midpoint.
For the next quarter, management came in above consensus with guidance of $4.64 EPS at the midpoint compared to $4.11 EPS expected. You can easily see why a gross margin and operating margin that is a bit lower is less of a problem with this kind of earnings strength.
Margins:
There are some puts and takes with the margins. Gross margin was down by 30 basis points QoQ and down YoY by 210 basis points.
Adjusted operating margin was in line at 10.8%, however, the GAAP operating margin was lower QoQ by 230 basis points at 8.1%. Both were down YoY – adjusted OM was down 170 basis points and GAAP OM was down 380 basis points. Stock based compensation increased to $57.38 million, up from $11 million in the year ago quarter. This is at 2.7% of revenue compared to 0.59% in the year ago quarter.
The net margin of 7.4% was in line for GAAP profits of $157M, and as stated, EPS was strong.
Cash Flow:
Operating cash flow was strong at $270.5 million for a margin of 12.7%. This is a seasonally strong quarter for free cash flow with $268 million and $3 million in capex. This is low capex compared to what we can expect the rest of the year. Next quarter, capex is expected to increase to $22 million, at the midpoint, and will be at $110 million for the fiscal year, at the midpoint.
Key Segments:
- The OEM appliance and large data center revenue of $1.17B was up 26% YoY and was flat QoQ.
- Enterprise and channel vertical reported $917M for 43% of revenue, down (-6%) QoQ by 200 basis points, and was up 10% YoY due to seasonally lower enterprise spending
- 5G, Telco and Edge/IoT reported $31M and was 2% of total revenue
These flat to negative QoQ growth in these segments helps illustrate why management may have declined to give an exact number for AI-related revenue until the seasonally low quarter is behind them.
The exact statement was this: "AI/GPU and rack-scale solutions again represented over 50% of our total revenues this quarter with AI/GPU revenues in both the enterprise/channel and the OEM appliance and large data center verticals."
The United States region was up 25% YoY yet was down 3% QoQ. Another hint that AI revenue may have been down QoQ is that all regions declined QoQ except Rest of World, which was up 38%. It’s likely AI revenue is coming from more developed regions, such as United States, Europe and APAC.
Server and storage systems are 93% of revenue while subsystems are 7% of revenue.
Inventory increased to 91 days, up from 75 days. Per management: “we built inventory for a seasonally strong Q2.”
Earnings Call & Additional Notes:
The headline of my post-ER write-up last quarter was Half of Revenue is from AI with a focus on the 52% AI-related revenue that was posted last quarter. Therefore, I immediately noticed the “AI, GPU and rack-scale solutions again represented over 50% of our total revenues this quarter” was a change from providing a precise number.
As stated under the Key Metrics section, the September quarter is seasonally soft, as it was down (-3%) QoQ. Therefore, this number may have not improved due to seasonal reasons and they didn’t want to spook the market given the outsized pressure on AI mentions. In this case, the number may have been between 50.1% and 51.9% and they felt it wasn’t necessary to highlight this considering it will improve quickly next quarter and beyond. Needless to say, we are monitoring this closely.
It was asked about on the call but to no avail:
“Nehal Choski
Okay. And can you give a little bit more precise number as far as what the exposure was in the September quarter other than greater than 50%?
David Weigand
That’s — we are giving that approximate figure and that’s our guide.”
By far, the most important question on the call was about the Q4 guide and fiscal year guide and whether management consider it to be conservative. Here is what was stated:
“Ananda Baruah
That’s actually really helpful context. I appreciate it. And then, I guess, sort of dovetailing from that, Charles. So the midpoint of the implied guide for the fiscal year, the raised guide, $10.5 billion, implies that the March quarter and June quarter would also be about $2.8 billion, which is the midpoint of your December quarter guide. And then you also, though, made mention of growth accelerating. And so — and that — and it seems like supply is getting better. You also have co-op capacity coming on, going into the year. So I guess the question is, is there conservatism built in into even the implied fiscal year guide that’s been raised or is there some pull-forward in December quarter that you think might be challenging to duplicate in the March and June quarter? It seems like conservatism, but just wanted to check that? Thanks.
Charles Liang
Yeah. Thank you. Again, we continue to gain lots of design win. So our back order has been growing faster than what we forecast in reality. So at this moment, $2.7 billion to $2.9 billion for December should be a very conservative number. And for our whole fiscal year, $10 billion to $11 billion, again, should be a conservative number. So I feel very optimistic to continue to grow quickly and that’s why we continue to grow our rack-scale, including a difficulty rack-scale rather than production capacity. Likewise, just, before we have 4,000 rack per month capacity and now pretty much we will grow to 5,000 rack per month capacity very soon. So we are very optimistic for the future growth.”
Conclusion:
This was a straight forward report, and we are not concerned with the 100 or 200 basis points that may be in question for AI revenue given the 300 basis point decline QoQ in total revenue. Next quarter will quickly resolve the issue with 32.1% QoQ total revenue growth. Management stating they are being conservative was a nice bonus to the raise and beat. This report helps us firm up SMCI as a 2024 position.
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