Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Super Micro is experiencing strong demand exceeding supply, and is actively increasing capacity to meet this demand, indicating potential for accelerated growth. Charles Liang stated, "Indeed, the demand is still stronger than supply. So if we have more supply, we will be able to ship more."
- The company is leveraging economies of scale and automation to grow quickly and efficiently, which should enhance operational margins and overall EPS. Charles Liang mentioned, "So when our economy of scale grow, we leverage automation system, again, for sales, for operation and for service. And that's why, I mean, we are in a good position to continue growing quickly." He also emphasized, "we need economies of scale because economies of scale are very important to our operation margin and overall EPS. So yes, we are ready to grow much quicker."
- Super Micro is winning new customers and expanding within existing ones, focusing on market share gains even at the expense of short-term margins, which may lead to long-term profitability. As David Weigand stated, "we are growing really quickly. And then -- and in order to do that, in order to take market share, we will take opportunities by being more competitive on pricing."
- Significant customer concentration poses risks, as two customers accounted for 26% and 11% of total revenues, respectively, in Q2 2024. The loss or reduction in orders from these major customers could materially impact the company's revenue.
- Decreasing gross margins due to aggressive pricing strategies may affect profitability. The company acknowledged that gross margins have moderated and they are being more competitive on pricing to gain market share.
- Increasing working capital requirements and potential need for external financing could strain financial stability. Rapid growth is consuming cash, and the company may seek additional funding sources, which could include debt or equity financing.
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Gross Margin Outlook
Q: How are you balancing market share gains with profitability?
A: Management acknowledges a step-down in gross margin due to competitive pricing to win new customers, aiming to maximize shareholder value by increasing volume and EPS through tight control of operating expenses. While they set a target gross margin range of 14% to 17% back in March 2021, they are evaluating this range monthly to ensure what's best for shareholders. -
Supply Constraints Impacting Growth
Q: Are supply constraints affecting revenue guidance and growth?
A: Demand is still stronger than supply, limiting shipment capacity despite improvements. The backlog is growing, and management remains somewhat conservative in guidance due to ongoing supply constraints. -
Future Growth Drivers
Q: What gives confidence in growth beyond this year?
A: Growth confidence stems from continued strong demand in generative deep learning and increasing opportunities in inferencing across various verticals, including private cloud and edge AI. Positive feedback from customers supports sustained growth. -
Customer Concentration
Q: Are the top revenue-contributing customers the same as before?
A: The largest customer, contributing 26% of revenue, is the same as before. The 11% customer is a long-term customer reaching this level for the first time. Customer contributions can vary, and increasing total revenue aims to diversify the customer base across large, medium, and small customers. -
Capital Requirements and Financing
Q: Do you need more external financing to support growth?
A: The company is exploring financing options to support growth while minimizing equity dilution. Working capital needs are increasing due to growth, with inventory growing over $1 billion, necessitating additional capital. -
Cash Conversion Cycle and Working Capital
Q: How will growth affect cash conversion cycle and working capital?
A: Rapid growth requires more working capital, affecting cash flows. Timing of inventory receipts and shipments can impact metrics. Strong demand in the March quarter suggests a strong quarter ahead. -
Liquid Cooling Adoption
Q: When will liquid cooling become significant?
A: While current systems at 600–700 watts per module are manageable with air cooling, liquid cooling becomes critical at 1,000 watts and above. Customers' data centers need more time to be ready, but the company is prepared to ramp up when demand increases. -
OpEx Growth and Economies of Scale
Q: Will operating expenses rise as you grow bigger?
A: The company leverages automation in sales, operations, and service to achieve economies of scale, allowing continued growth without proportional increases in operating expenses.