Super Micro Computer ($SMCI) – Earnings Summary – August 10, 2024
Demand
SMCI met revenue estimates & its identical guidance. Its 81% 3-year revenue CAGR compares to 63% Q/Q & 41% 2 quarters ago. $800 million in revenue was delayed to next quarter due to capacity constraints.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profits & Margins
- Gross profit margin (GPM) materially missed estimates.
- Missed $7.81 GAAP EPS estimate by $2.30 & missed guide by $2.12.
- Missed $8.14 EPS estimate by $1.89 & missed guide by $1.77.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $1.67B in cash and equivalents.
- $4.4B in inventory vs. $1.4B Y/Y.
- $1.7B in convertible notes.
- $475M in term loans.
- Basic share count rose 11% Y/Y (raised equity in March).
- Announces 10-1 stock split.
Guidance & Valuation
- Annual revenue estimate beat by 19.7%
- Q1 revenue guidance beat by 19%.
- Q1 EPS guidance Missed $7.58 estimates by $0.10.
- Q1 GAAP EPS guidance beat $6.60 estimates by $0.22.
SMCI trades for 15x next year’s earnings. EPS is expected to grow by 56% Y/Y next year and by 30% Y/Y the year after. Considering the cyclical nature of this business model, I don’t think EPS growth estimates are all that valuable. They will violently swing as cycles unfold.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Summarizing the Strange SMCI Quarter
The entire call was spent on margin trends and expectations amid the large revenue beat paired with an EPS miss. This stirred up a renewed bull/bear debate, which we will focus on here.
Direct Liquid Cooling Supply Chain:
Margin pressure was split evenly between two items: Direct Liquid data center Cooling (DLC) demand and revenue mix shift. Starting with DLC demand, the strong momentum is not surprising. The capacity arms race is not ending, and SMCI hardware is a key piece of AI data centers. Its DLC technology cuts energy usage by 40%, boosts data center performance and uptime, and lowers carbon footprint. Its new data center building block solution (DCBBS) also reduces data center build time from 3 years to 2 years. That’s compelling, as large caps race to build capacity. Simply put, DLC “dramatically improves total cost of ownership” vs. air-cooled systems and should therefore continue to see adoption rates rise.
Demand levels for liquid-cooled racks surprised the team. It responded to this demand by quickly ramping the supply chain and “paid a lot of expedited cost” to support this. That weighed heavily on margins, but should be temporary. Capacity at its new Malaysia factory, expansion projects in the USA and more time to build capacity in an efficient manner are all expected to erode this margin headwind over time. The company sees a clear path back to a 14% – 17% gross margin.
SMCI sees its DLC tech as industry-leading and it’s choosing to spend more on expediting supply to capture market share gains. Players like Nvidia are trying hard to compete here, so securing demand today does make some sense. This decision fostered a roughly 75% market share of liquid cooling deployments this past quarter. It will ramp rack production capacity from 1,000/month to 3,000/month by 2025. It’s also now extending its easily-deployed DLC rack solutions to next-gen AI data centers, which should simply build on this product’s strong cyclical momentum.
“Now we are further expanding this solution to the entire data center, with rapid deployment of large-scale AI infrastructure.”
Founder/CEO Charles Liang
Hyperscaler Mix Shift:
The other source of the margin compression was a large order from a hyperscaler, which led to revenue mix shift and some overall pricing pressure. This is the potentially more structural and concerning margin headwind. It points to SMCI perhaps losing some pricing power with larger customers, and needing to concede contractual terms to compete.
Take on the Matter:
Simply put, if supply chain bottlenecks are resolved and mix shift stabilizes, margins should improve. I think the bottleneck resolution is inevitable, but the mix shift could continue to weigh on margins. Furthermore, the GenAI data center boom will not be perpetual. If crazy demand normalizes a bit next year, that could weigh further on pricing pressure for this company. If it’s right about leading in DLC, competitive differentiation should diminish the impact of that potential headwind. I’m not sure where I stand here, I don’t focus on this sector, but these are important variables to pay attention to as we move into 2025.
“We expect margins to gradually increase throughout 2025.”
CFO David Weigand
