Super Micro Computer, Inc. (NASDAQ:SMCI) Q2 2024 Earnings Call Transcript

Super Micro Computer, Inc. (NASDAQ:SMCI) Q2 2024 Earnings Call Transcript January 29, 2024

Super Micro Computer, Inc. beats earnings expectations. Reported EPS is $5.59, expectations were $5.48. Super Micro Computer, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Cole and I’ll be your conference operator today. At this time, I would like to welcome everyone to Super Micro Computer Fiscal Second Quarter 2024 Results. With us today, Charles Liang, Founder, President, and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Vice President of Corporate Development. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] And with that, I’d like to pass the call over to Michael Staiger.

Michael Staiger: Good afternoon, and thank you for attending Supermicro’s call to discuss financial results for the second quarter, which ended December 31, 2023. With me today are Charles Liang, Founder, Chairman, and Chief Executive Officer; and David Weigand, Chief Financial Officer. By now, you should have received a copy of the news release from the company that was distributed at the close of regular trading and is available on the company’s website. As a reminder, during today’s call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company’s website under the Events & Presentations tab. We have also published management’s scripted commentary on our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook, including guidance for the third quarter of fiscal year 2024 and the full fiscal year 2024. There are a number of risk factors that could cause Super Micro’s future results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2023 and our other SEC filings. All of these documents are available on the Investor Relations page of Super Micro’s website.

We assume no obligation to update any forward-looking statements. Most of today’s presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or the press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today’s press release and in the supplemental information attached to today’s presentation. At the end of today’s prepared remarks, we will have a Q&A session for sell-side analysts to ask questions. I will now turn the call over to Charles.

Charles Liang: Thank you, Michael and good afternoon everyone. I’m delighted to share our second quarter results, which show a record-breaking performance for Super Micro. We achieved revenue of $3.66 billion, a 133% increase from last year, and earnings per share of $5.59. This is our first quarter ever with over $3 billion revenue. More importantly, this single quarter’s revenue surpassed our annual revenue for 2021. This fantastic quarterly result was driven by strong demand and improving supply conditions for GPU and related key system components. Our rack-scale plug-and-play IT and AI Total Solution continues to gain more new customers, along with their confidence in Super Micro as their go-to infrastructure partner. Our AI rack-scale solutions, especially the Deep-Learning and LLM-optimized based on NVIDIA HGX-H100, continue gaining high popularity.

The demand for AI inferencing systems and mainstream compute solutions has also started to grow. The exciting news is that, finally, we are entering an accelerating demand phase now from many more customer wins. To support faster growth, we have increased our working capital recently by raising about $600 million with an equity offering. Moreover, we have other programs to increase our cashflow without additional equity dilution to support short and long-term sustainable growth. Overall, I feel very confident that this AI boom will continue for another many quarters, if not many years. And together with the related inferencing and other computing eco system requirements, demand can last for even many decades to come, we may call this an AI revolution.

Let’s go over some key financial highlights. First, fiscal Q2 net revenue totaled $3.66 billion, up 103% year-on-year and up 73% quarter-on-quarter, exceeding the top end of our original guidance of $2.9 billion for December quarter. Second. Fiscal Q2 non-GAAP earnings of $5.59 per share were well above $3.26 a year ago and exceeded the guidance range of $4.40 to $4.88, further demonstrating continued strong operating leverage. Economy of scale is important to us for continue strong growth. Supermicro is at the forefront of the AI revolution, where the pace of innovation is accelerating. We are leading the race by developing the most innovative AI infrastructure on many platforms at rack scale, for almost any industry, and for any market vertical.

As the market leader, we have been preparing to more than double the size of our current AI portfolio with the coming soon NVIDIA CG1, CG2 Grace Hopper Superchip, H200 and B100 CPUs — GPUs, L40S Inferencing-optimized GPUs, AMD MI300X/MI300A, and Intel’s Gaudi 2 and Gaudi 3. All these new platforms will be ready for high volume production in the coming month and quarters. Moreover, we are adding further optimized new architectures for the upcoming NVIDIA GPU product lines. Our AMD MI300X systems are sampling now, and our Intel Gaudi 3 system is coming soon. More importantly, we are continuing to invest and innovate in datacenter and enterprise liquid-cooling technology to make sure these high-power AI platforms are in line with our green computing methodology, while improving the performance, efficiency, and reliability of systems in a datacenter.

As a Total IT Solutions innovator, manufacturer and provider, more and more of the major deployments is being delivered as an integrated rack solution, particularly for the AI cluster deployments. Servers, networking, storage, security features, and software are optimized, validated, delivered, and serviced as an integrated rack cluster from Supermicro’s manufacturing facilities worldwide. Leveraging our building block architecture and operation/production automation systems, we can deliver optimized rack solutions with time-to-market and quality advantages for our customers more efficiently than competition. Our TTD, Time-to-Delivery factor has been in a continuous improvement. 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.

At the same time, our volume — high volume clean room rack-scale production facility will be ready to service critical customers very soon. The rapid growth of our business is driving the need for additional R&D, solution optimization, manufacturing and service capacity. 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.

To summarize, our record quarterly performance demonstrates our Building Block rack scale plug-and-play IT and AI industry leadership, which continues to accelerate and shows signs of strong market share gains. The continued strength of existing customer builds and ramp of newly acquired customers, and the robust pipeline of new products coming in 2024 gives me confidence that fiscal Q3 revenue will be in the range of $3.7 billion to $4.1 billion. Additionally, we are expecting continued strength for the second half of fiscal 2024, and now forecast revenue for the full fiscal year ending in June to be in the range of $14.3 billion to $14.7 billion. We are in overdrive to accelerate Supermicro 3.0 business model with this AI boom. At the meantime, we are preparing ourselves for the next phase of Supermicro business growth with Supermicro 4.0 and its expanding TAM.

Now is certainly the most exciting time yet for Supermicro. Before passing the call to David Weigand, our Chief Financial Officer, I want to thank again to our partners, our customers, our Supermicro employees and our shareholders for your strong support. Now, let me pass to our CFO David, for more financial details.

David Weigand: Thank you, Charles. Fiscal Q2 2024 revenues were $3.66 billion, up 103% year-over-year and up 73% quarter-over-quarter. Revenues were higher than our initial guidance of $2.7 billion to $2.9 billion and slightly above our recently updated guidance of $3.6 billion to $3.65 billion. Our growth was driven by demand from new and existing customers for our leading AI and rack-scale Total IT solutions and an improving supply chain. Next generation AI and CPU platforms continue to drive strong levels of design wins, orders and backlog from top-tier data centers, emerging cloud service providers, enterprise/channel, and edge/IoT/telco customers. During Q2, we recorded $1.48 billion in the enterprise/channel vertical, representing 40% of revenues versus 43% last quarter, up — this was up 55% year-over-year and up 62% quarter-over-quarter, driven by enterprise AI and CPU upgrade programs.

The OEM appliance and large data center vertical revenues were $2.15 billion, representing 59% of Q1 revenues versus 55% last quarter, up 175% year-over-year and up 83% quarter-over-quarter. Two existing CSP/large data center customers represented 26% and 11% of total revenues for Q2. Emerging 5G, Telco, Edge, IoT revenues were $35 million or 1% of Q2 revenues. Growth was driven by AI/GPU and rack-scale total IT solutions, which again represented over 50% of total revenues this quarter with AI/GPU revenues in both the enterprise/channel and the OEM appliance/large data center verticals. Server and Storage Systems comprised 94% of Q2 revenue and Subsystems and Accessories represented 6%. ASPs increased on a year-over-year and quarter-over-quarter basis, driven by product and customer mix.

By geography, the US represented 71% of Q2 revenues, Asia 18%, Europe 8%, and rest of the world 3%. On a year-over-year basis, US revenues increased 139%, Asia increased 98%, Europe decreased 8%, and rest of the world increased 67%. On a quarter-over-quarter basis, US revenues increased 61%, Asia increased 191%, Europe increased 51%, and rest of the world increased 37%. The Q2 non-GAAP gross margin was 15.5%, which was down quarter-over-quarter from 17% as we continued to focus on winning strategic new designs and gaining market share. Turning to operating expenses, Q2 OpEx on a GAAP basis increased by 6% quarter-over-quarter and 58% year-over-year to $193 million, driven by higher compensation expenses and headcount. On a non-GAAP basis, operating expenses increased 18% quarter-over-quarter and 41% year-over-year to $153 million.

Q2 non-GAAP operating margin was 11.3% versus 10.8% last quarter as we benefited from operating leverage driven by higher revenues. Other Income and Expense for Q2 was a net expense of approximately $16 million, consisting of $8 million in interest expense and a loss of $8 million principally from foreign exchange. Interest expense increased sequentially as we drew down on short-term bank credit facilities for working capital during the quarter. The tax provision for Q2 was $61.5 million on a GAAP basis and $71.1 million on a non-GAAP basis. The GAAP tax rate for Q2 was 17.3% and the non-GAAP tax rate was 17.8%. Q2 non-GAAP diluted EPS of $5.59 exceeded the high end of our initial guidance of $4.40 to $4.88 and slightly above our recently updated guidance of $5.40 to $5.55 due to operating leverage.

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. CapEx was $15 million for Q2 resulting in negative free cash flow of $610 million versus positive free cash flow of $268 million last Quarter. 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.

The closing balance sheet cash position was $726 million, while bank debt was $376 million resulting in a net cash position of $350 million versus a net cash position of $397 million last quarter. Turning to the balance sheet and working capital metrics compared to last quarter, the Q2 cash conversion cycle was 61 days versus 86 days in Q1. Days of Inventory decreased by 24 days to 67 days versus the prior quarter of 91 days due to the timing of shipments during the quarter. Days sales outstanding was down by 14 days quarter-over-quarter to 29 days while days payables outstanding decreased by 13 days to 35 days. Now, turning to the outlook, we expect a strong March quarter as we continue to gain momentum with new and existing customers for our AI and rack-scale total IT solutions.

For the third quarter of fiscal 2024 ending March 31, 2024, we expect net sales in the range of $3.7 billion to $4.1 billion, GAAP diluted net income per share of $4.79 to $5.64 and non-GAAP diluted net income per share of $5.20 to $6.01. We expect gross margins to be slightly lower than Q2 levels. GAAP operating expenses are expected to be approximately $201 million and include $39 million in stock-based compensation expenses that are not included in non-GAAP operating expenses. The outlook for Q3 of fiscal year 2024 diluted GAAP EPS includes approximately $28 million in expected stock-based compensation expenses, net of tax effects of $14 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to be a net expense of approximately $9 million.

The company’s projections for Q3 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 13.8%, a non-GAAP tax rate of 15.8%, and a fully diluted share count of 60.1 million for GAAP and 61.0 million for non-GAAP. We expect CapEx for Q3 to be in the range of $18 million to $21 million and a range of $105 million to $115 million for the fiscal year 2024. For the fiscal year 2024 ending June 30, 2024, we are raising our guidance for revenues from a range of $10 billion to $11 billion to a range of $14.3 billion to $14.7 billion. Michael, we’re now ready for Q&A.

See also 15 Best Annual Dividend Stocks To Buy Now and Analysts on Wall Street Lower Ratings for These 10 Stocks.

Q&A Session

Operator: [Operator Instructions]. It’s also been asked to keep yourself to one question with one follow-up question. We’ll pause here briefly as questions are registered. Our first question is from George Wang with Barclays. Your line is now open.

George Wang: Hey guys, congrats on the quarter on a strong guide. I have two questions. Firstly, can you kind of supply versus demand, obviously for the December quarter probably driven by both including supply and also strong demand. So, if you can maybe you can talk about backlog level and also on the supply side, are they still ongoing constraints right now?

Charles Liang: Yeah, thank you for the question. Indeed, the demand is still stronger than supply. So, we have a more supply, we would be able to ship more and we are very happy to continue and grow our capacity, work out betas, even higher support so to grow business even quicker.

George Wang: Okay, thank you. And quickly a follow-up just on the liquid cooling. You talked about kind of expanding to 1,500 racks per month after June this year, and maybe you can talk about your expectation for the total production mix from liquid-cooled racks by year-end, and also maybe you can parse out kind of difference, the configure within the liquid cooling. I know you guys have some immersion cooling and air to liquid cooling. So maybe you can double-click on this thematic topic going forward.

Charles Liang: Yeah. Thank you George for the question. In the liquid cooling, we are beating the industry. So, we have a huge capacity ready and have very mature total solution ready, but lots of customer, already rack liquid cooling by their data center, needed some more time to be to ready. I mean their infrastructure needed some more time. So, we believe — I think liquid cooling will be the trend and we continue to make ourselves ready and try our best to support the customer, including providing some help to their data center infrastructure. So, I believe liquid cooling percentage will continue to grow, but at this moment most of the shipping is still air cooled.

George Wang: Okay great, thank you. I’ll go back to the queue.

Charles Liang: Thank you.

Operator: Our next question is from Samik Chatterjee with J.P. Morgan. Your line is now open.

Samik Chatterjee: Thanks for taking my questions and congrats on the strong results here. Maybe, if I can just start with the gross margin. You did have a step-down here in 2Q, you’re guiding to a slight moderation in 3Q. Maybe just help me understand, as a management team, how do you think about balancing the opportunities that you’ve going forward in terms of market-share wins and design-wins relative to sort of big growing profitably over the long-run, how you sort of evaluating those opportunities side-by-side and then I have a follow-up. Thank you.

David Weigand: Sure, thanks, Samik. So, when we win a new customer, we always try to go in and out. And so we go into the organization and try to spread out into the different divisions. And so, in order to do that as we take on new customers, we do evaluate and try to win the business, which requires us to be competitive. And so, we always are balancing in the interest of shareholder value, how to maximize that. 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.

Charles Liang: 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.

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.

Samik Chatterjee: Thank you. Thanks for taking my questions.

Operator: Our next question is from Nehal Chokshi with Northland. Your line is now open.

Nehal Chokshi: Yeah, thanks. Great impressive guidance and thanks for explanation regarding the dynamic on the forward guidance for both March quarter, plus the June Q guide. Looking at the incremental revenue for the December quarter. Dave, you already alluded to this, you’re making shareholder accretive decision. So, that’s what’s driving the tick down in the gross margin, yet, your operating margin has improved, Q-over-Q. So just to be clear, when you’re talking about making shareholder accretive decision, it’s still with respect to current revenue not just simply looking at future free cash flows associated with future revenue follow-on from these lower-margin opportunities, is that correct?